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Macroeconomic Policy Advice
and the Article IV Consultations:
A European Union Case Study
Mark Weisbrot and Helene Jorgensen
January 2013
Center for Economic and Policy Research
1611 Connecticut Avenue, NW, Suite 400
Washington, D.C. 20009
202-293-5380
www.cepr.net
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Contents
Introduction ........................................................................................................................................................ 4
Methodology ....................................................................................................................................................... 7
Fiscal adjustment ............................................................................................................................................................ 8
Inflation targeting ........................................................................................................................................................... 8
Labor force and employment expansion .................................................................................................................... 9
Social policies .................................................................................................................................................................. 9
Comparative Overview ...................................................................................................................................10
Fiscal policies ................................................................................................................................................................ 12
Inflation targeting ......................................................................................................................................................... 14
Labor market policies .................................................................................................................................................. 14
Social Policies ................................................................................................................................................................ 17
Europe 2020 and the IMF Article IV consultations ...................................................................................21
Article IV consultation recommendations and the business cycle ...........................................................23
Country Summaries .........................................................................................................................................24
Austria ............................................................................................................................................................................ 24
Belgium .......................................................................................................................................................................... 25
Bulgaria .......................................................................................................................................................................... 26
Cyprus ............................................................................................................................................................................ 27
Czech Republic ............................................................................................................................................................. 27
Denmark ........................................................................................................................................................................ 29
Estonia ........................................................................................................................................................................... 29
Finland ........................................................................................................................................................................... 30
France ............................................................................................................................................................................. 31
Germany ........................................................................................................................................................................ 32
Greece ............................................................................................................................................................................ 33
Hungary.......................................................................................................................................................................... 33
Ireland ............................................................................................................................................................................ 34
Italy ................................................................................................................................................................................. 34
Latvia .............................................................................................................................................................................. 36
Lithuania ........................................................................................................................................................................ 36
Luxembourg .................................................................................................................................................................. 37
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Malta ............................................................................................................................................................................... 38
Netherlands ................................................................................................................................................................... 38
Poland ............................................................................................................................................................................ 39
Portugal .......................................................................................................................................................................... 40
Romania ......................................................................................................................................................................... 41
Slovakia .......................................................................................................................................................................... 41
Slovenia .......................................................................................................................................................................... 42
Spain ............................................................................................................................................................................... 42
Sweden ........................................................................................................................................................................... 43
United Kingdom........................................................................................................................................................... 44
Conclusion ........................................................................................................................................................45
References .........................................................................................................................................................48
Appendix A .......................................................................................................................................................50
Acknowledgements
The authors would like to thank the following people for helpful reviews and helpful comments:
Prakash Loungani, economists from the European Department of the International Monetary Fund,
Iyanatul Islam, Peter Bakvis, Dean Baker, Anis Chowdhury, David Kucera, Simon Wren-Lewis,
Uma Rani Amara, and Dianne Holland.
The authors also thank the International Labor Organization for their funding and support for this
project. The opinions expressed in this paper are solely those of the authors, and are not to be
associated with the ILO.
About the Authors
Mark Weisbrot is an economist and Co-Director, and Helene Jorgensen is a Senior Research
Associate at the Center for Economic and Policy Research, in Washington D.C.
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Introduction
Europe remains mired in its second recession in three years, and the International Monetary Fund’s
(IMF’s) most recent (October 2012) World Economic Outlook (WEO) sees its problems as perhaps
the most important drag on world economic growth, which has slowed to a projected 3.3 percent
for 2012 (as compared with 3.8 percent for 2011 and 5.1 percent for 2010). For Europe, the IMF
notes that “[t]he baseline outlook for the region, weaker now than expected in the April 2012 WEO,
is for further anemic growth or contraction in 2012 and a moderate pickup in growth in 2013. The
possibility that the euro area crisis will escalate remains a major downside risk to growth and
financial sector stability until the underlying issues are resolved” (2012a: p. 62-63).
Many economists, including Nobel Laureate Paul Krugman (2012), have argued that the policies
implemented by the European authorities have helped push Europe into recession, and/or have
been impeding the recovery. The IMF is part of the so-called “Troika” – with the European
Commission (EC) and European Central Bank (ECB) – that has been deciding or strongly
influencing economic policy in the eurozone, as well as affecting policy in the rest of the European
Union, especially since the world economic crisis and recession of 2008-2009. It is therefore worth
examining IMF policy recommendations to see whether they have contributed to the ongoing crisis
in Europe, and also how they might affect other European Union goals such as those of Europe
2020, which seeks to reduce social exclusion, promote public investment in research and
development, and promote employment and education (European Commission 2012a).
The IMF makes policy recommendations to European countries through its Article IV consultations
and resulting papers. These are the bilateral part of the IMF’s surveillance responsibility; the IMF
also does multilateral surveillance of the world economy, for example in its bi-annual World
Economic Outlook, Global Financial Stability Report, and Fiscal Monitor. The IMF describes its
surveillance function as follows:
“Surveillance in its present form was established by Article IV of the IMF’s Articles of Agreement,
as revised in the late 1970s following the collapse of the Bretton Woods system of fixed exchange
rates. Under Article IV, member countries undertake to collaborate with the IMF and with one
another to promote stability. For its part, the IMF is charged with (i) overseeing the international
monetary system to ensure its effective operation, and (ii) monitoring each member's compliance
with its policy obligations” (2012b).
The IMF’s Article IV consultations provide recommendations on a broad range of issues including
fiscal, monetary, and exchange rate policy; health care and pensions; labor market policy (including
wages, unemployment compensation, and employment protections); and numerous other policy
issues.
This paper examines the policy advice given by the IMF to European Union countries in 67 Article
IV agreements for the four years 2008-2011 (IMF 2012c). It is a follow up to an ILO study on 50
Article IV agreements undertaken for low and middle-income countries (Islam et al. 2012). It
focuses in particular on fiscal adjustments, inflation targeting (in countries where it is relevant, i.e.
outside the eurozone), employment generation and social protection.
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This content analysis finds a consistent pattern of policy recommendations, which indicates (1) a
macroeconomic policy that focuses on reducing spending and shrinking the size of government, in
many cases regardless of whether this is appropriate or necessary, or may even exacerbate an
economic downturn; and (2) a focus on other policy issues that would tend to reduce social
protections for broad sectors of the population (including public pensions, health care, and
employment protections), reduce labor’s share of national income, and possibly increase poverty,
social exclusion, and economic and social inequality as a result.
Fiscal consolidation is recommended for all 27 EU countries, and expenditure cuts are generally
preferred to tax increases. In some cases there are targets or limits on public debt/GDP ratios or
fiscal deficits that are below those of the Maastricht treaty. There is repeated emphasis on cutting
public pensions and “increasing the efficiency” of health care expenditures. Raising the retirement
age is a standard recommendation, without any correlation to a country’s life expectancy. Although
slowing population growth can have important benefits (not the least of which is reduced pressure
on the world’s resources and climate change), an aging population is seen throughout these
agreements as a threat to the fiscal sustainability of government expenditures. This is not
demonstrated through empirical evidence, for example, which might take into account productivity
growth that would support a rise in the ratio of retirees to workers, while allowing for rising living
standards for both, as has been the case in prior decades. There also appears to be a predilection for
increasing labor supply, irrespective of unemployment or labor force participation rates. This
includes such measures as reducing eligibility for disability payments or cutting unemployment
compensation, as well as raising the retirement age.
Labor market policy recommendations are overwhelmingly geared towards measures that would
either reduce wages directly or – as in the efforts to increase the labor force – put downward
pressure on wages. Such measures include the attenuation of industry-wide bargaining practices, and
scaling back employment protections.
The paper’s findings are also consistent with other evidence of policy mistakes, including that
provided by IMF research. On the macro-economic side, the IMF’s most recent WEO finds that the
IMF (as well as other forecasters) seriously under-estimated government spending multipliers in
growth forecasts for countries since the beginning of the Great Recession. Instead of a multiplier of
0.5, they find a range of 0.9 to 1.7 (2012a: p. 41-43). This could explain some of the large gap
between the IMF’s growth projections and growth outcomes for countries undergoing fiscal
consolidation under IMF agreements. For example, in September 2010 the IMF projected GDP
growth in Greece of -2.6 percent for 2011 and +1.1 percent for 2012. The actual results were -6.9
percent for 2011 and - 6 percent (October WEO projection) for 2012 (Weisbrot and Montecino
2012). Similarly, in Latvia the IMF projected, in January of 2009, -5 percent growth for 2009; the
actual decline was 18 percent (Weisbrot and Ray 2010).
It is worth noting that recent IMF research provides evidence for a more nuanced approach to fiscal
consolidation. Perhaps most importantly, an IMF Staff Discussion Note published last June (Barkbu
et al. 2012) expresses a number of serious concerns about how lagging growth since the Great
Recession “has pressured already deteriorated fiscal positions and public debt dynamics, and
increased unemployment, particularly in the Southern euro area countries..." (p. 5). While
supporting many of the structural reforms recommended in the Article IV consultations, and also
favoring fiscal consolidation, the paper notes that a "distinct threat is that, in an environment of
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weak aggregate demand, supply-side measures and restructuring fail to boost output, leaving part of
Europe in a period of protracted stagnation" (p. 8). It offers examples of how, in the absence of
sufficient aggregate demand, the proposed structural reforms could go bad: "relaxing employment
protection may not stimulate hiring in the short term, but increase unemployment. Similarly,
reducing unemployment insurance or increasing the retirement age would lower disposable income
if those induced to seek work do not find jobs... Furthermore, because persistent weak demand can
negatively impact long-run prospects through hysteresis effects in unemployment, it is imperative to
increase growth soon" (p.17).
Similarly, an empirical Working Paper by Batini et al (2012) draws the following conclusions, among
others:
Implementing fiscal consolidations during periods of positive output growth reduces significantly the
impact on output;
If consolidations need to be implemented during downturns (for instance, to regain
market confidence), they should prioritize increases in net taxes…
If consolidations have to occur during downturns and prioritize cuts in public
consumption and investment, they should be smooth and gradual and be accompanied by increases in
net taxes (p.8).
A 2009 examination of IMF agreements and reviews made during the Great Recession, with 41
borrowing countries, found that 31 recommended pro-cyclical fiscal or monetary policies, or (in 15
cases) both (Weisbrot et al. 2009). These were policies that could be expected to exacerbate a
significant slowdown or recession. In that study, there were many cases in which the IMF’s procyclical policies were based on overly-optimistic assumptions about economic growth. For example,
of the 26 countries that had at least one review, 11 IMF reports had to lower previous forecasts of
real GDP growth by at least 3 percentage points, and three of those had to correct forecasts that
were at least 7 percentage points overestimated.1
Pro-cyclical fiscal policies have also played a major role in the deep recessions experienced by Spain,
Italy, Portugal, and Ireland. The IMF’s role, together with the European authorities, in promoting
these policies, is only partially reflected in the Article IV papers reviewed below. But the “one-size
fits all” policy of fiscal consolidation that is evident in these Article IV consultations is consistent
with what the IMF recommended in borrowing countries in the eurozone.
There are also a number of references to the idea that crises present an opportunity to make changes
that might otherwise be difficult. In Spain’s 2010 Article IV consultation, for example, IMF staff
argued that “empirical evidence also suggests that recoveries from economic crises often serve as an
opportunity for reform” (p. 13). These statements, combined with the consistency of the IMF’s
1 The content analysis below only looks at Article IV papers, so it does not fully capture many of the IMF’s worst
macroeconomic policy outcomes in Europe. That is because countries such as Greece, Portugal, and Latvia –
although they are included below because they had at least one Article IV consultation between 2008-2011, did not
always have regular Article IV consultations while they were operating under IMF lending agreements; although they
did have reviews of their agreements, which are not examined in this paper. For example, Greece has had
enormously pro-cyclical fiscal policies under IMF agreements, cutting spending by a full 8.7 percent of GDP during
2010-2011, with more tightening for 2012 and beyond, and the economy still shrinking.
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recommendations and lack of correlation with the specific conditions of the countries, indicate a
policy agenda that suggests a ‘one-size-fits-all’ approach.
Over the past two and a half years, as the crisis in the eurozone has unfolded, the European
authorities have repeatedly intervened –even including ECB interventions or pledges to intervene in
sovereign bond markets – in order to stabilize financial markets and prevent the crisis from
worsening at various times, even while promoting pro-cyclical policies that have prolonged
recession. However, there have been numerous press reports indicating2 that these authorities,
including the ECB, were unwilling to take further measures to end the crisis because of a fear that
doing so would remove the pressure on eurozone governments to make certain reforms (Jones and
Suoninen 2012; Fontanella-Khan 2012).3 It is possible that the current recession and recurring crises
in Europe are a result of this attempt to implement unpopular reforms in various countries –
especially since the ECB has several times shown that it can easily limit, and lower interest rates on
the sovereign bonds of Italy and Spain when it wants to do so.
The Article IV consultations examined in this paper provide an important picture of the reform
agenda that the European authorities are looking for in their interactions with countries in the
European Union. For this reason they deserve careful analysis and scrutiny.
Methodology
This content analysis reviewed 67 IMF Article IV consultations with EU countries from January 1,
2008 to December 31, 2011 (See Appendix A for a full list of consultations). For countries, that had
entered lending arrangements, consultation reports were not necessarily available. The policy
recommendations reviewed were for the medium term, typically a two to five year timeframe
following the consultation. When possible, the IMF’s own determination of the medium term
recommendations in the reports was used. In the analysis, we defined a policy recommendation to
be a recommendation that was new or went beyond policies that were being implemented or
planned to be implemented by the country’s authorities.
The content analysis focused on four areas of economic and social policies: fiscal policies, inflation
targeting, labor market policies, and social policies, including education, pensions, health and
welfare. The analysis consisted of four steps. The first step of the analysis identified policy
recommendations made in a given consultation report. Second step coded the policy
recommendation under variable category. To minimize potential biases in the characterization of a
2 “France and Italy piled more pressure on the European Central Bank on Tuesday to agree to steps this week to reduce
crippling borrowing costs for southern eurozone states. But the bank is expected to outline rather than detail its
strategy on Thursday in order to keep the pressure on politicians to bring their deficits and debts under control. ….
[ECB executive board member Joerg Asmussen, the most senior German at the IMF] said it was crucial to ensure
that ECB decisions did not reduce pressure on governments to reform. That is one reason why the central bank is
unlikely to reveal all details of the plan on Thursday.”
3 “Mario Draghi, ECB president, last week said the bank would do ‘whatever it takes’ to safeguard the euro, fuelling
investors’ hopes that the central bank would buy Spanish and Italian bonds in an effort to bring borrowing costs
under control. But senior eurozone officials have damped such hopes, suggesting that the ECB will seek further
guarantees of reform before assisting debt-ridden countries.”
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recommendation, the third step linked the recommendation to a quote for the country summaries in
section 6. In the final step, a review of the quotes was conducted to assess whether they were taken
in or out of context.
Fiscal adjustment
The IMF Article IV consultations with EU countries typically centered on fiscal adjustment and
financial security. Fiscal adjustment to reduce the government primary budget deficit is attained
from a reduction in government expenditures, an increase in tax revenues, or a combination of both.
The goals of fiscal adjustment identified by the IMF were fiscal sustainability, credibility, and
reducing uncertainty. The content analysis reviewed recommendations for identified government
expenditure and debt targets, the expenditure-revenue composition of consolidation, and specific
measures proposed. The explicit spending restraint variable is defined as the IMF recommendation
for explicit control or cuts in public spending (see Table 1). Measures ranged from reducing public
sector employment to expenditure ceiling to social reforms. The public sector debt variable is
defined to include recommendations to rein in the public debt. The revenue mobilization variable is
defined to include aspects of tax and non-tax revenue reforms.
TABLE 1
Examples of the Types of Fiscal Adjustment Recommendations
Category
Recommendation
Fiscal Consolidation
Expenditures
Expenditures
Debt
Revenues
Taxes
Other revenues
“once the current crisis is past, the fiscal stance will have to be
significantly tightened to achieve long-run stability”
“introducing a cap on total expenditure growth for each level of
government and the social security administration“
“containing public wage growth”
“to put the government debt-to-GDP ratio on a downward path”
“much of the adjustment effort may need to fall on the revenue
side”
“phasing out exemptions and deductions; taxing the selfemployed and the informal sector”
“Ireland has scope for raising social security contributions”
Reference
Belgium 2008: 4
Belgium 2009: 20
Bulgaria 2010: 5
Hungary 2008: 3
Estonia 2009: 4
Greece 2009: 24
Ireland 2009: 27
Source: Various IMF Article IV Consultations, 2008-2011.
Inflation targeting
The inflation targeting variable is defined as recommendation for inflation targeting. The content
analysis looked at recommendations on specific inflation targets, interest rates, exchange rates, and
other inflation control measures (see Table 2). Inflation targeting recommendations were reviewed
only for EU countries which had not adopted the euro as currency. The content analysis included
both short-term as well as medium-term recommendations on inflation targeting, as the IMF
consultation reports typically did not differentiate between the two. Inflation targeting
recommendations did not feature prominently in the consultations, and were often not discussed.
This might in part be due to most EU countries experienced a slowing of inflation during the period
of study due to the recession, and thus inflation was in most cases not a concern. In the case of
Finland, the 2010 consultation report noted, “inflation is likely to decline as a sizable output gap
strengthens resistance to price and salary increases” (p. 14).
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Furthermore, inflation concerns were expressed in several of the consultations with countries in the
eurozone that had above-average inflation. Labor market policies of increasing labor force
participation and wage restraint were proposed as effective tools to combat inflation, and these are
further discussed under labor market policies.
TABLE 2
Examples of the Type of Inflation Targeting Recommendations
Category
Recommendation
Meeting target
Interest rates
Expectations
Non-specific
“monetary policy should aim to reduce CPI inflation to the 3
percent target”
“further gradual hikes in the policy rate… would bring inflation
back to the 2½ percent target”
“tight monetary policy and subdued growth will be required to
prevent elevated inflation expectations”
“boosting competition requires bringing inflation down”
Reference
Hungary 2008: 3
Poland 2011: 11
United Kingdom
2008: 22
Romania 2010: 25
Source: Various IMF Article IV Consultations, 2008-2011.
Labor force and employment expansion
The labor force variables are defined to include references to expansion of labor force expansion
and employment generation (see Table 3). The analysis looked at measures to increase labor supply,
labor demand and labor market flexibility. The consultations often suggested increased labor market
flexibility, including scaling back employment protections, lowering severance pay, and
decentralizing collective bargaining, rather than employment protection. Labor supply measures
included training, reducing unemployment benefit, and increasing the retirement age. Labor demand
focused on wage moderation.
TABLE 3
Examples of the Types of Labor Market Policy Recommendations
Category
Recommendation
Wages
Employment
protection
Labor supply
Labor market
flexibility
Employment
Unemployment
benefits
Training
Reference
“even though in the medium term eliminate wage indexation
remains necessary,…”
“further liberalization of employment protection legislation is
necessary in the medium term”
“with concerns about unemployment easing, labor market
policies should re-focus on looming labor supply pressures”
“… labor market flexibility should remain policy priorities”
Luxembourg 2011:
17
Slovenia 2009: 12
“curtailing public sector employment by not replacing a sizeable
share of retiring public servants”
“limiting the level of unemployment benefits over time or their
duration”
“foster development of human resources in technical fields”
Belgium 2011: 37
Denmark 2010: 31
Slovakia 2009: 16
Belgium 2009: 22
Estonia 2011: 17
Source: Various IMF Article IV Consultations, 2008-2011.
Social policies
The education variable is defined as recommendations on primary, secondary and higher education,
as well as training and apprenticeship programs. Other social policy variables are defined to include
any reference to social transfers, old-age pensions, health care, child benefits and anti-poverty
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programs (see Table 4). The topics of poverty, social exclusion and income security were rarely
addressed in the consultations reviewed. Social policy recommendations were often made in the
context of fiscal consolidations, and overwhelmingly focused on scaling back coverage and benefits.
A recurrent theme in the consultation was the aging of the population and resulting pressures on
public expenditures on pensions and health care.
TABLE 4
Examples of the Types of Social Policy Recommendations
Category
Recommendation
Education
“improving… the quality of education”
“consideration should also be given to… the indexing of benefits to
more appropriate price baskets”
Pension
“legislating additional future increases in the retirement age
(especially for women)”
Health care
“savings require… (ii) additional efforts to rein in health care
expenditures”
Disability and others “tighten eligibility for child, disability and sickness benefits, and
decrease the term of maternity benefits to international levels”
Welfare
“reforms to strengthen the targeting of transfer programs and
tighten eligibility”
Poverty
“social support measures should be targeted to reach the truly
needy”
Source: Various IMF Article IV Consultations, 2008-2011.
Social benefits
Reference
Czech Republic
2010: 6
Ireland 2009: 26
Italy 2008: 25
Netherlands 2008:
24
Lithuania 2009: 14
Slovenia 2009: 9
Cyprus 2009: 17
A method of coding of variables was then followed to identify if the IMF consultation
recommended and referred to a certain policy. Specific key terms were identified, and sentences that
capture the incidence of a particular form of policy advice were also taken into account. A variable
was coded 1 = “increase” if an increase or expansion in policy A is recommended for country X; 2
= “decrease” if a decrease or contraction in policy A is recommended for country X; N = “neutral”
if the recommendation neither increased nor decreased policy A, or it could not be determined from
the information provided; and 0 = “no” if policy A is not recommended.
Comparative Overview
The content analysis examined the fiscal policy recommendations offered in IMF Article IV
consultations from 2008 to 2011. During this period, the European Union entered an economic
recession. As shown in Table 5, some countries were more severely impacted with sharp and/or
sustained contraction in the economy (including Estonia, Greece, Latvia, and Lithuania), while other
countries recovered fairly quickly (including Germany, Poland, and Sweden). The IMF consultations
provided both short-term economic advice addressing the immediate economic crisis as well as
medium to long-term advice for fiscal adjustment. The content analysis focused primarily on the
medium-term recommendations.
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TABLE 5
Real GDP Growth (Annual Percent Change) for EU Countries, 2008-2011
EU Country
2008
2009
2010
2011
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
1.4
1.0
6.2
3.6
3.1
-0.8
-3.7
0.3
-0.1
0.8
-0.2
0.9
-2.1
-1.2
-3.3
2.9
0.8
4.1
1.8
5.1
0.0
7.3
5.8
3.4
0.9
-0.8
-1.0
-3.8
-2.8
-5.5
-1.9
-4.7
-5.8
-14.3
-8.5
-3.1
-5.1
-3.3
-6.8
-5.5
-5.5
-17.7
-14.8
-5.3
-2.6
-3.7
1.6
-2.9
-6.6
-4.9
-7.8
-3.7
-5.0
-4.0
2.1
2.4
0.4
1.1
2.7
1.3
2.3
3.3
1.7
4.0
-3.5
1.3
-0.8
1.8
-0.3
1.4
2.7
2.5
1.6
3.9
1.4
-1.6
4.2
1.2
-0.3
5.9
1.8
2.7
1.8
1.7
0.5
1.7
0.8
7.6
2.7
1.7
3.1
-6.9
1.7
1.4
0.4
5.5
5.9
1.6
2.1
1.1
4.3
-1.7
2.5
3.3
0.6
0.4
4.0
0.8
Source: International Monetary Fund, World Economic Outlook, October 2012:
Coping with High Debt and Sluggish Growth. Washington, DC, October 2012: Table
A2. Advanced Economies: Real GDP and Total Domestic Demand, p. 191; and Table
A4. Emerging Markets and Developing Economies: Real GDP, p. 194.
In a number of consultations, IMF staff argued that the economic crisis provided an opportunity for
economic reforms. For example, in the 2009 consultation report with France, IMF staff wrote that
“historical experience indicates that successful fiscal consolidations were often launched in the midst
of economic downturns or the early stages of recovery”4 (p. 20). In other country cases, IMF staff
made the case that the economic crisis created a necessity for fiscal consolidation. For example, the
2010 consultation with the Czech Republic stated “the crisis has highlighted the urgency of fiscal
4 The IMF report did not provide a reference for this claim. Here, it is worth citing that the IMF’s research argues the
opposite, that is, fiscal consolidation is best undertaken during normal periods of growth and that consolidation
exercises should be carefully sequenced. Perhaps this is the reason why, by 2011, the IMF noted (in the case of
Netherlands), that “historical experience indicates that negative effects on demand from budget consolidation are
likely to be higher when monetary policy is not able to accommodate tightening, as is currently the case” (p. 21).
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adjustment” (p. 4). Only a few consultations directly discussed the contractionary effects of
proposed fiscal consolidation. For example the 2010 consultation with the United Kingdom noted
that “although this consolidation effort involves painful decisions and dampens short-run growth, it
is necessary to enhance credibility and ensure fiscal sustainability” (p. 26).
Fiscal policies
The IMF consultations advised fiscal consolidation for each of the 27 EU countries. The
consultations generally emphasized expenditure cuts over revenue increases. In the 2010
consultation with Latvia, IMF staff stated that “international experience suggests expenditure cuts,
particularly current spending, generate more sustainable adjustment” (p. 29). The 2011 consultation
with the Netherlands furthermore noted that “expenditure-based consolidations have generally been
more successful, based on international evidence” (p. 25). The 2009 consultation with the Republic
of Ireland found that “large fiscal adjustments that focused on expenditure cuts—particularly the
wage bill and social transfers— have been better sustained than tax-based consolidations and have
often been expansionary rather than contractionary” (p. 26). 5
An expenditure ceiling was proposed for some countries to rein in government spending. For
example in the 2010 consultation with the Republic of Ireland, IMF staff noted that “a mediumterm fiscal framework incorporating expenditure ceilings is a valuable management tool” (p. 27).
Most consultations provided specific recommendations on expenditure reductions, and in nearly all
cases included reduction in social programs (see subsection below on social policies). Other areas
frequently identified for consolidation were the slowing of wage growth in the public sector, public
sector wage ceilings, reducing public sector employment, and reorganizing public institutions.
Figure 1 shows that expenditure decreases were recommended in consultations with most of the
EU countries reviewed (96.3%). The most commonly recommended measures to rein in
expenditures related to pensions. The IMF recommended reduction in pension spending from
current level or projected level in consultations with 81.5 percent of countries. On the other hand,
revenue increases were recommended in 70.4 percent of countries. In two-thirds of the countries in
which revenue increases were recommended, the IMF also recommended revenue decreases. The
IMF did not provide recommendations on government revenue in consultations with 25.9 percent
of the countries.
The IMF consultations identified various areas for revenue increases including taxes, deductions,
and social security contributions. Tax policy recommendations were country specific and often
included a mixture of increases and reductions in taxes. For example, the 2008 consultation with
Hungary proposed “shift in the tax burden away from labor and to consumption and wealth” (p. 3).
Based on the information provided in the consultation reports, the net revenue effect could not be
determined in most consultations. Tax areas identified for revenue enhancement included income
taxes, property taxes, inheritance taxes, value added tax (VAT), reducing or phasing out the
mortgage interest deduction, and phasing out other deductions, exemptions and loopholes. For
example, in the 2011 consultation, Italy was advised to “reduc[e] tax evasion” (p. 1). The 2009
consultation with Greece recommended “phasing out exemptions and deductions; taxing the selfemployed and the informal sector” (p. 24).
5 The IMF did not provide a reference for this claim in any of the reports mentioned. See above.
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FIGURE 1
Country Frequency of Fiscal Policy Recommendations for EU Countries, 2008-2011 (in percent)
120,0
100,0
100.0
96.3
80,0
70.4
60,0
48.1
40,0
20,0
0,0
Fiscal consolidation
Expenditure decrease
Revenue increase
Revenue decrease
Policy Guidelines
Source: Various Article IV consultation reports with EU countries, 2008-2011. Note: The IMF recommended both
revenue increases and revenue decreases in consultations with 10 countries. The net revenue effect could not be
determined based on the information provided in the consultation reports. The IMF did not provide revenue
recommendations in consultations with 6 countries.
In the case of some countries, the IMF determined that tax levels were too high, and advised
lowering taxes. For example, in the 2011 consultation with Germany, IMF staff wrote that “recent
studies find that among all taxes, corporate taxes are the most harmful to economic growth”6 (p. 28).
In a number of consultations, specific budget deficit or debt targets were identified. In some cases,
the IMF staff recommended stricter targets than the ceilings set by the Stability and Growth Pact.
For example, the 2011 consultation with Hungary stated “the constitutional mandate to maintain
public debt below 50 percent is commendable” (p. 16). IMF staff found “the current fiscal rules -targeting a surplus of 1 percent of GDP across the cycle, supported by medium-term expenditure
ceilings – remain[ed ] well suited for Sweden” in the 2010 consultation (2010: 36). Few consultations
reviewed expressed concerns about planned fiscal consolidation. The consultation with Poland
warned that “aiming at a deficit of 3 percent already by 2012 is too ambitious” (p. 18). While the
2011 consultation with the Netherlands supported the authorities’ planning consolidation but
cautioned that “historical experience indicates that negative effects on demand from budget
consolidation are likely to be higher when monetary policy is not able to accommodate tightening, as
is currently the case” (p. 21). Finally, in the 2011 consultation with Slovenia, IMF staff determined
the public debt level to be sustainable, but still recommended fiscal consolidation: “While general
government debt is likely to remain sustainable, fiscal consolidation is necessary in light of the
6 No references were provided. See above
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uncertainty in financial markets and contingent liabilities” (p. 8).
Inflation targeting
The IMF consultations offered inflation targeting advice to five non-euro countries (see Table 6).
The recommendations were to tighten monetary policy to bring inflation within the established
target (for example Poland 2011), or lower the inflation target itself (Czech Republic 2008). Only
one consultation discussed controlling inflation in detail. The UK consultation report for 2008
discussed “a monetary stance that remains focused on the inflation target;” (p. 4) and “tight
monetary policy and subdued growth will be required to prevent elevated inflation expectations
from getting embedded into wages and prices” (p. 22). Two years later, the 2010 consultation
expressed concerns over disinflation. “If a stalling recovery were to heighten disinflationary forces,
quantitative easing should be expanded” (p. 37).
TABLE 6
IMF Policy Recommendations on Inflation Targeting, and Average and Projected
Inflation for Non-Euro EU Countries, 2008-2011
Avg. Inflation
Projected Inflation
Inflation Targeting
2008-11
2015
Recommendation
Bulgaria
2.7
3.0
Czech Republic
2.7
2.0
1, 2
Denmark
2.4
2.0
Hungary
4.5
3.0
1
Latvia
1.9
2.2
Lithuania
2.7
2.4
Poland
3.3
2.5
1,2
Romania
4.5
2.6
Sweden
1.8
2.0
1
Source: International Monetary Fund, World Economic Outlook tables, inflation
average consumer prices, percent change; and various Article IV consultation reports
with EU countries, 2008-2011. Note: “1” denotes in tightening/lowering of inflation
targeting, while “2” denotes a loosing of inflation targeting.
Labor market policies
The majority of the consultations reviewed addressed labor market policies. The content analysis
uncovered five main areas of labor market recommendations: Wages, employment protection and
flexibility, collective bargaining, work incentives, and vocational training. During the period of this
study, unemployment rose in the EU countries as the recession took hold. Some countries were
impacted more than others due to the severity of the recession and their specific labor market
structure. By 2010, the unemployment rate ranged from 4.4 percent in Austria to 20.1 percent in
Spain (see Table 7).
Figure 2 summarizes the country frequency of recommendations on wages, employment
protection, unemployment benefits, labor supply/labor force participation, and vocational training.
For the majority countries, the IMF provided recommendations on wage growth, and the advice
overwhelmingly favored wage moderation (18 out of 19 countries). The IMF provided advice on
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labor supply and/or labor force participation with 48.1 percent of countries. In every case, the
advice promoted policies increasing labor supply. Finally, IMF recommended scaling back
employment protections in 14 out of 14 countries receiving advice on employment protection. In
consultations with 7 countries, advice on vocational training and apprenticeship programs
supplemented recommendations on weaker employment protection.
FIGURE 2
Country Frequency of Labor Market Policy Recommendations for EU Countries, 2008-2011 (in percent)
80,0
70,0
70.4
60,0
50,0
51.9
48.1
40,0
37.0
30,0
20,0
18.5
10,0
0,0
Wages
Employment
Protection
Unemployment
Benefits
Labor Supply
Training
Policy Guidelines
Source: Various Article IV consultation reports with EU countries, 2008-2011.
In 2007, IMF staff stated in their consultation with France that “labor market rigidities are probably
the single most significant barrier to higher economic growth and employment” (p. 10). Increases in
labor market flexibility through scaling back of employment protection, decentralizing collective
bargaining, flexibility in overtime and workweek hours were mentioned in consultations with 15
countries. For example, the 2010 consultation with Germany advised “further increasing labor
market flexibility through decreasing both legal and labor-court based employment protection” (p.
27). The IMF consultations did not promote the concept of flexicurity adopted by Denmark and
promoted in the Europe 2020 Strategy. Only the 2009 consultation with Slovenia made the case for
“further liberalization of employment protection legislation… could be implemented in the context
of a ‘flexicurity’ approach”7 (p. 12). On the other hand, consultations with Italy (2008), the
Netherlands (2008), and Belgium (2009) advised reducing income security by scaling back on
unemployment benefits level and/or duration of benefits.
To increase employment, IMF consultations for 18 countries advised reducing nominal or real wage
7 The 2009 consultation with Cyprus proposed flexicurity as an option in the public sector.
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growth (Figure 2). Specific recommendations included reducing or eliminating cost of living
adjustments (COLA) (for example see Cyprus 2009), wage modification in collective bargaining (see
Sweden 2011), minimum wage moderation (see France 2009), and containing public sector wage
growth. The 2010 consultation with Bulgaria speculated that “containing public wage growth…
[would] also help limit economy-wide wage growth and help competitiveness” (p. 19).
TABLE 7
Labor Force Participation Rate, Unemployment Rate, 2010, and Incidence of IMF Recommendations on
Labor Supply and Employment Protection Policies for the EU Countries, 2008-2011
EU Country
Labor Force
Policy Guidelines
Unemployment Rate
Policy Guidelines for
Participation Rate
for Labor Supply
2010
Employment Protection
2010
Expansion
Austria
75.1
1
4.4
2
Belgium
67.7
1
8.3
2
Bulgaria
66.5
10.2
Cyprus
74.4
6.5
Czech Republic
70.2
1
7.3
2
Denmark
79.4
1
7.4
Estonia
73.8
1
16.9
2
Finland
n/a
1
8.4
France
70.5
1
9.7
2
Germany
76.6
1
7.1
2
Greece
68.2
12.6
2
Hungary
62.4
1
11.2
Ireland
69.8
13.7
Italy
62.2
1
8.4
Latvia
73.2
18.7
Lithuania
70.5
17.8
2
Luxembourg
68.2
4.5
Malta
60.3
6.8
2
Netherlands
78.2
1
4.5
2
Poland
65.6
1
9.6
Portugal
74.0
11.0
Romania
63.6
1
7.3
Slovakia
68.7
14.4
2
Slovenia
71.5
7.3
2
Spain
73.4
20.1
2
Sweden
n/a
8.4
2
United Kingdom
75.5
7.8
Sources: ILO, LABORSTA, Short Term Indicators of the Labour Market, Indicator, Labor Force Participation Rate,
ages 15-64 years; Unemployment Rate, ages 15-74 years; and various IMF consultation reports for EU countries,
2008 to 2011. Note: “1” denotes a recommended increase or expansion of policy, e.g. increase in labor supply or
expansion of employment protection; and “2” denotes a recommended decrease/contraction of policy. In eight
additional consultations (not included), increasing labor force participation was not discussed explicitly, but the
consultations included recommendations which would have a positive effect on labor force participation, such as
increasing the retirement age.
The labor force participation rate varied widely across EU countries, with Malta (60.3%), Italy
(62.2%) and Hungary (62.4%) having the lowest rates and Denmark having the highest rate (79.4
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percent) (see Table 7). Twenty-two consultations with 13 countries recommended increasing labor
force participation/labor supply. For example, the 2010 consultation with Denmark recommended
that “labor market policies should re-focus on looming labor supply pressures,” despite a near
doubling in the unemployment rate over just one year (p. 22). Consultations with an additional eight
countries did not explicitly discussed increasing labor force participation or labor supply, but the
consultations included recommendations which would have a positive effect on labor force
participation, such as increasing the retirement age. An increase in labor force participation is
believed to increase potential output and reduce wage pressure. The 2009 consultation with Belgium
made the case for “further labor market reforms [being] essential for increasing the labor supply and
potential output, as well as for supporting job creation.” Specific labor market recommendations for
Belgium included enhancing monitoring of job search activities, increasing job counseling, applying
penalties for refusal of suitable jobs, raising the effective retirement age, equalizing women’s
retirement age to that of men, phasing out early retirement schemes, and tightening eligibility for
disability benefits.
Interestingly, there was no apparent correlation between a country’s labor force participation rate
and recommendation to increase the labor force. Bulgaria and Malta had some of the lowest labor
force participation rates in EU, but the IMF did not provide specific advice on increasing the labor
supply in the consultations reviewed.8 At the same time, the IMF recommended increases in labor
supply for Austria, Denmark, Germany, and the Netherlands, countries which had some of the
highest labor force participation rates. Likewise, recommendations to increase labor force
participation were not obviously correlated with the countries’ unemployment rates either.
Social Policies
The consultations provided few specific recommendations on education. When recommendations
were made, they were often brief and generic in nature, such as “improve quality of education”
(Bulgaria 2010, Czech Republic 2010, Italy 2011, Latvia 2010). The content analysis identified seven
country-specific recommendations on primary, secondary and higher education in seven
consultations with seven countries. Some of the recommendations focused on investment in
education to increase human capital. Other recommendations were geared toward reducing
expenditures. For instance, the 2009 consultation with Austria identified four key areas for
consolidation including education (p. 32). The 2009 Lithuania consultation noted that there was
“scope for savings in the education sector” (p. 14).
Many EU countries experienced high unemployment during the period of study, and vocational
training and apprenticeship training programs were proposed in consultations with ten countries to
reduce mismatches in the labor market. The 2011 consultation with Estonia noted that “despite
double-digit unemployment, skill mismatches and job opportunities [outside the country] have
resulted in labor shortages,” and it found “the authorities’ ongoing efforts to harmonize vocational
education with the needs of the labor markets… are welcome” (p. 16). In several cases, vocational
training was advocated in combination with increased flexibility. For example, the 2011 consultation
with Slovakia mentioned “sharpening the orientation of education and vocational programs towards
labor market needs,” while at the same time promoting labor market flexibility to maintain
8 The 2008 consultation with Bulgaria did review policies implemented by authorities to increase labor force
participation.
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competiveness (p. 25).
EU countries have some of the highest life expectancies in the world (see Table 8). Long life
expectancies combined with low birth rates have resulted in an “aging of population” in EU
countries. The aging population was a recurrent theme in the IMF consultations with EU countries.
Most consultations reviewed explicitly addressed the economic ramifications from an aging
population in terms of pension and health care expenditures. For example, the 2011 consultation
with the Netherlands emphasized “the priority should be reducing the impact of aging on fiscal
expenditures (p. 25).
TABLE 8
Life Expectancies at Birth, 2010, and Incidence of IMF Recommendations on Pension and Health Care
Policies for EU Countries, 2008-2011
Country
Life expectancy (in years)
Pension
Health Care
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
80
80
74
79
77
79
75
80
81
80
80
74
80
82
73
73
80
81
81
76
79
73
75
79
82
81
80
2
2
2
2
2
2
2
2, N
2,N
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2,N
2
N
2
2
2
2
2
2
2
2
Source: World Bank, Data Indicator, Life expectancy at birth, total (years); and various IMF consultation reports for
EU countries, 2008 to 2011. Note: “1” denotes a recommended increase or expansion of policy, “2” denotes a
recommended decrease or contraction of policy; and “N” denotes either neutral or could not be determined from the
information provided.
The IMF offered advice on pensions for 22 out of 27 countries reviewed. Pension recommendations
were frequently referenced in the context of fiscal consolidation and focused on reducing pension
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spending in every single case. For example, the 2010 consultation report with Poland noted that “the
substantial fiscal adjustment needed over the medium term will require changes in entitlement
programs” (p.19). The 2009 Austrian consultation identified “key areas for consolidation to
include… pensions, and education and health” (p. 32). Without exception, the pension
recommendations focused on scaling back programs by tightening eligibility, raising retirement ages,
increasing service period, reducing benefits levels (often through tightening pension indexation), and
phasing out early retirement programs. Several consultations advocated expansion of private
pensions to supplement cuts in public pension. For example, the 2011 consultation with Slovenia
noted “the private pillar should be expanded to compensate for the public benefit cuts” (p. 9). The
2010 Romanian consultation suggested that Romania “build up the pillar two private pension
system” (p. 22). While the 2010 consultation with the Czech Republic recommended going a step
further by “moving to a fully funded second-pillar private pension scheme” (p. 5).
Interestingly, there did not appear to be a correlation between life expectancy and recommendations
to scale back pension programs (see Table 8). The Republic of Ireland and Sweden had some of the
highest life expectancies, but reviewed consultations did not provide recommendations on
increasing retirement age. On the other hand, consultations with Hungary and Lithuania, countries
with some of the lowest life expectancies at birth, recommended increasing the retirement age
and/or reducing benefit levels.
A total of 26 consultations for 15 countries explicitly mentioned health care policies. As in the case
of pensions, health care policy advice was frequently framed in terms of budget consolidation. For
instance, the 2008 consultation with Germany warned of “the risks associated with healthcare costs
due to an aging population” (p. 28). Generally, the health care policy recommendations were generic
in nature, such as “continued efficiency gains… in health and long-term care spending” (France
2011: p. 21); “the large efficiency gains that are possible in the health care sector should be promptly
reaped” (Austria 2011: p. 9); and “a comprehensive health care reform, with the view to improve the
efficiency and quality of the health care system is needed” (Bulgaria 2010: 18). One exception was
the 2010 Czech Republic consultation report, which offered specific recommendations to ”reduce
the broad coverage of publicly provided and insured services and allow greater scope for private
sector provision of health services;” and “introduce voluntary insurance, personal health accounts,
and choices in health benefits plans” (p. 6).
Figure 3 shows the country frequency for various social policy areas. Social policy
recommendations included both recommendations for expansion of social programs as well as
shrinking programs. The IMF consultations provided few recommendations on alleviating poverty
and increasing the standards of living through social programs. Most welfare policy
recommendations were centered on cutting expenditures. For instance, the 2011 consultation with
the Czech Republic found “rationalizing entitlements and the generous welfare system is
unavoidable” (p. 11). Recommendations on unemployment benefits focused on reducing level and
duration of benefits in order to strengthen job search incentives, reduce public expenditures and
increase labor supply. The consultations rarely addressed poverty directly, though some
consultations suggested that authorities better target programs to vulnerable populations as the
expenditures are being reduced. The 2009 consultation with the Republic of Ireland found “it will be
necessary to articulate a strategy that moves away from universalism in social welfare to one that
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FIGURE 3
Country Frequency of Social Policy Recommendations for EU Countries, 2008-2011(in percent)
90,0
80,0
81.5
70,0
60,0
55.6
50,0
55.6
48.1
40,0
30,0
20,0
10,0
0,0
Pension
Health care
Education
Welfare
Policy Guidelines
Source: Various Article IV consultation reports with EU countries, 2008-2011. Note: Education variable does not
include advice on apprenticeship and training programs.
relies more on targeting and incentives” (p. 26). Though the Scandinavian countries out-performed
many of the other EU countries on fiscal, employment and social measures during the study period,
the IMF consultations did not make recommendations to expand the social welfare model.
Figure 4 summarizes the country frequency of IMF recommendations to reduce social program
spending by level of debt. The 27 EU countries were divided into low and high debt countries.
Twelve countries with an average gross debt below 50 percent of GDP (2008-2011) were
categorized as low debt, and fifteen countries with an average gross debt of 50 percent or more were
categorized as high debt. The country frequency rates for pension and unemployment benefit
reductions were somewhat higher for high debt countries than for low debt countries. On the other
hand, low debt countries received advice on reducing welfare spending at a higher frequency than
high debt countries. However, it may be that policy measures with greater fiscal impact were
recommended for high debt countries than low debt countries. The country frequency rates on
reducing health care and education spending were nearly the same for the two groups of countries.
Categorizing countries by projected gross debt in 2015 instead of average debt over the study period
does not change these findings.
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FIGURE 4
Country Frequency of Recommendations on Reduce Social Program Spending, by Gross Debt Level, for EU
countries, 2008-2011 (in percent)
100,0
Low Debt
90,0
86.7
80,0
70,0
High Debt
75.0
60,0
50,0
53.3
50.0
50.0
40,0
40.0
30,0
26.7
25.0
20,0
20.0
10,0
8.3
0,0
Pension
Health care
Education
Policy Guidelines
UI benefits
Welfare
Source: IMF, World Economic Outlook Database, general government gross debt as percent of GDP, October 2012;
and various Article IV consultation reports with EU countries, 2008-2011. Note: Average debt level over the period
2008-2011. Countries with average gross debt below 50 percent of GDP were categorized as low debt (12
countries), and countries with 50 percent or more were categorized as high debt countries (15 countries).
Europe 2020 and the IMF Article IV consultations
The Europe 2020 Strategy, adopted in 2010, outlines goals for “a smart, sustainable and inclusive
economy” by 2020 (European Commission 2012a). The European Commission created five EU
headline targets for employment, education, R&D, energy efficiency, and poverty. Each EU country
has adopted their own national targets in each area reflecting different circumstances of the
countries. The Europe 2020 Strategy is composed of seven flagship initiatives to reach these targets:
1) digital agenda; 2) innovation union to support R&D; 3) increase youth employment; 4) resource
efficiency; 5) industrial policy for the globalization era; 6) agenda for new skills and jobs; 7)
European platform against poverty.
The Europe 2020 Strategy provides few specifics on reaching the identified goals. For example, the
concrete actions described for the Agenda for New Skills and Jobs are: improving flexibility and
security (flexicurity), equipping people with the right skills, improving the quality of jobs and
working conditions; and improving the conditions for job creation. However, EU president
Barroso’s speech (2012) about the Europe 2020 Strategy gave further insight into job creation
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policies and mentioned extending the retirement age, reforming labor markets and pension systems
to make them more flexible, deregulation, opening up previously closed sectors, free trade
agreements, and project bonds to increase investment in energy, transportation and digital
infrastructure.
The lack of details on policies to reach the goals of the Europe 2020 Strategy makes it difficult to
evaluate whether IMF Article IV recommendations are consistent or incompatible with the Europe
2020 strategy. There are several common themes for sustainable growth in the Article IV
consultations and the Europe 2020 Strategy, including deregulation, open trade, and flexible labor
markets. President Barroso observed that the Europe 2020 Strategy is a growth agenda that goes
beyond fiscal consolidation, and it is therefore not necessarily inconsistent with the IMF ‘s fiscal
recommendations. The Europe 2020 Strategy envisions a key role for public investment in energy
efficiency, R&D and digital infrastructure for growth; whereas the IMF’s focus of expenditure cuts
as the center of consolidation leaves little room for public investment for a number of EU countries.
New skills and job creation are central to the Europe 2020 Strategy for sustainable growth and
reduced social exclusion. One of the 2020 targets is to raise the average employment-to-population
ratio to 75 percent for EU, with Denmark and the Netherlands having the most ambitious targets of
80 percent of 20-64 year olds being employed by 2020. Like the Europe 2020 Strategy, the IMF
consultations focused on a combination of labor market flexibility and increased labor supply.
However, the Europe 2020 Strategy couples increased flexibility with security (e.g. flexicurity),
whereas the IMF consultations typically viewed security as a potential barrier for labor market entry.
For example, the IMF consultations mentioned reducing duration and generosity of unemployment
benefits as a mean to increase labor force participation.
Both the Europe 2020 Strategy and the IMF consultations see a role for vocational training and
apprenticeship programs to increase employment prospects of young workers entering the work
force and reduce job mismatches. Education is assigned a key role in the Europe 2020 Strategy to
reach the growth goals, while the IMF Article IV consultations offered few recommendations on
education. In the cases where recommendations on education were put forward, they were generally
generic in substance such as “support investment in human capital,” (Luxembourg 2011: p. 1) and
“more widespread early childhood care and education” (Germany 2011: p. 11).
The biggest difference between the Europe 2020 Strategy and the IMF Article IV recommendations
were in the areas of social policies. The IMF consultation primarily discusses pension and health
care reform in the context of fiscal consolidation. Reducing the costs of an aging population was
seen as the key to cutting public expenditures, and IMF recommendations focused on increasing the
retirement age and reducing benefits. This differs from the Europe 2020 Strategy that lists improved
access to social security and health care services. In terms of social policies to alleviate poverty, the
IMF consultations promoted better targeting of benefits, which in the context of fiscal consolidation
implied reducing benefits for most people, other than those with very low income, whereas the
Europe 2020 Strategy promotes “better use of EU funds to support social inclusion” (European
Commission 2012b).
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Article IV consultation recommendations and the
business cycle
The IMF Article IV consultations underestimated the severity of the recession in consultations with
a number of countries. In the 2009 consultation with Greece, IMF staff predicted that “Greece’s
growth decline from peak to trough would still be milder than for the euro-area as a whole” (p. 11).
Moreover, “staff projects some recovery in the late 2010” (p. 11). In fact, real GDP declined by 6.9
percent in 2011, and was projected to decline by an additional 6.0 percent in 2012 (IMF 2012a:
Table A2). The 2008 consultation with Italy projected output “to contract by about ½ percent in
2008 and 1 percent in 2009” (p. 3). In 2009, Italy’s real GDP declined by 5.5 percent, and the 2011
consultation report observed that “Italy suffered one of the largest output contractions in the euro
area…and is experiencing one of the slowest recoveries” (p. 4).
In the 2007 consultation with France, “staff forecasts GDP growth of 1.6 percent in 2008, with a
recovery in 2009” (p. 3). However, the 2009 report observed that “a severe recession hit France in
2008” with a real GDP decline of 3.1 percent in 2009. In some cases, the IMF forecasts were on
target. For example, the 2008 consultation with Estonia predicted “a severe recession” for 2009, (p.
24) and advised Estonia authorities “to rein in the budget deficit despite the recession” (p. 22) In
2009, real GDP declined by 14.3 percent, and the 2009 consultation observed that “the economy is
contracting sharply” (p. 5).
The unanticipated severity and duration of the economic downturn means that a number of IMF
country consultations conducted in 2008 and 2009 did not modify advice to reflect actual economic
circumstances. For instance, in the 2008 consultation with Denmark, the IMF staff argued that “the
2007 cyclical slowdown was welcome given record low unemployment and fast rising wages, but the
global crisis has increased the risk of a hard landing” (p. 18). The consultation advised against an
economic stimulus stating that “the case for further discretionary easing is weak because some
slowing is needed to stop the decline in competitiveness” (p. 1). The next report for Denmark in
2010 began with observing that “Denmark is recovering from a deep recession,” (p. 1) following a
decline of 5.8 percent in real GDP in 2009.
Overall, there was no discernible change in medium and longer-term recommendations in the four
policy areas of fiscal adjustment, inflation targeting, labor market policies and social policies
identified in the content analysis. In some instances the framing of the advice shifted. For instance,
in several earlier consultations concerns were expressed about labor supply shortages, while lateryear consultations discussed increasing labor force participation. In some policy areas,
recommendations became more specific over time. Reducing public spending related to aging of the
population was a recurrent theme in the consultations. In earlier consultations, pension reform
advice tended to be general and not specific to the country’s specific circumstances, while later
consultations provided more country-specific recommendations. For example, the 2008 consultation
with Austria identified pensions as a “key area” for consolidation, but provided few specifics;
whereas the 2010 consultation offered a list of recommendations ranging from “all other avenues to
early inactivity for older workers… must also be closed rapidly” to “job opportunities for older
workers need to be improved” (p. 9).
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During the economic recession, a number of IMF consultations advised that automatic stabilizers be
allowed to operate. However, in the cases of several countries, the IMF argued that there was not
sufficient the fiscal space for counter-cyclical policy. The 2008 consultation with Estonia determined
that there was “little room for countercyclical measures which would anyway be of only modest
impact” (p. 3). Poland on the other had had let counter-cyclical measures fully operate, and the 2010
consultation determined that “the highly counter-cyclical fiscal policy has been a main reason for
Poland’s [economy] having avoided a recession” (p. 25).
Country Summaries
Austria
The 2008 Article IV consultation emphasized the need for structural reforms “with a special focus
on further deregulation, increasing competition in domestic markets, and labor market reforms” (p.
1). The consultation provided few specific recommendations. Concerns about inflation hampering
competitiveness were expressed and IMF staff encouraged opening up the energy and “free
professions” markets for competition, as well as continued wage moderation (p. 17).
The 2009 Article IV consultation recommended “the development of a credible exit plan, aimed at
structural fiscal consolidation over the medium term” (p. 1). IMF staff argued that “expenditure
measures are preferable to tax hikes” (p. 32). “Key areas” identified for consolidation were
“administration at lower levels of government, pensions, and education and health” (p. 32). The
report also mentioned increases in fuel and property taxes as options (p. 21). Austria had recently
implemented a medium-term budgeting framework but IMF staff cautioned “that the medium-term
expenditures ceilings have to be sufficiently ambitious…for ensuring fiscal sustainability” (p. 21).
By 2010, the Austrian economy had recovered from the recession, and the 2011 Article IV
consultation centered on “speeding up debt reduction by increasing expenditure efficiency.” (p. 7)
“Staff urged for stronger consolidation measures of at least ½ percent of GDP…until the structural
deficit reaches zero” (p. 8). Three expenditures areas were identified for consolidation: pension,
healthcare and subsidies (p. 9). Specific recommendations included, “the early retirement scheme for
long-term insured should be fully abolished,” “eligibility for disability pensions [should be] further
reduced,” and “all other avenues to early inactivity for older workers…must also be closed rapidly,”
while “job opportunities for older workers need to be improved” (p. 9). Furthermore, “the large
efficiency gains that are possible in the health care sector should be promptly reaped” through
centralized hospital planning, federal-level hospitals financing, and strengthening of outpatient
treatment and prevention (p. 9). Finally, subsidies to public enterprises should be reduced (p. 9).
The consultation identified labor markets and education as two key areas for structural reform (p.
13). Labor market policies should focus on increasing labor force participation of older workers and
low-skilled workers. Specific recommendations were “a reduction in social security contributions at
the low end of the wage distribution,” “measures to close the large educational attainment gap of
children with immigrant background, “and “tertiary education reform to accelerate human capital
accumulation” (p. 14, 16).
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Belgium
The 2008 Article IV consultation stated that “the global financial crisis has hit the country
particularly hard in recent months,” (p. 3) and predicted that “Belgium will suffer a significant
recession in 2009” (p. 4). In the near-term, IMF staff recommended “fiscal policy in 2009 should
allow for full operation of the automatic stabilizers” (p. 4). But “once the current crisis is past, the
fiscal stance will have to be significantly tightened to achieve long-run stability” (p. 4). Specific
recommendations were “a structural adjustment of at least 0.7 percent of GDP per year once the
crisis has past,” and “returning the debt-to-GDP ratio onto a downward trajectory” (p. 21). To
improve productivity and market efficiencies, IMF staff recommended “modifying indexation
mechanisms within the current centralized bargaining framework,” “easing of restrictions on new
retail establishments, opening hours and sales periods,” transparency in energy supply”, making the
“Competition Council… a watchdog against rent-seeking behavior,” and deregulating prices and
liberalizing the market for over-the-counter drugs” (p. 5, 18-19).
The 2009 Article IV consultation (released in March 2010) found “now that the worst of the
recession seems to have passed, the time is ripe for ambitious action on the structural front” (p. 21).
“Further labor market reforms are essential for increasing the labor supply and potential output.” (p.
22) Specific labor market recommendations were to reduce rigidities stemming from labor taxes,
“limit[] the level of unemployment benefits over time or their duration,” “enhance monitoring of
job search activities, apply penalties for refusals of suitable jobs, and increase job counseling and
training opportunities” (p. 22). To increase labor market participation, recommendations focused on
“raising the effective retirement age” and “extending activation programs to older workers,”
“reconsidering employment protection legislation,” and “expanding job counseling and training
opportunities” (p. 23). Post-crisis fiscal policy recommendations included, “adoption of a rule-based
fiscal framework [to] help to increase the credibility of the consolidation efforts” (p. 4). IMF staff
recommended “introducing a cap on total expenditure growth for each level of government and the
social security administration while also considering additional revenue measures” (p. 20).
The 2010 Article IV recommendation reiterated the recommendations of the previous year. IMF
staff agreed with the authorities’ goal of a balanced budget (p. 4). “Achieving the appropriate
objective of a balanced budget by 2015 will require…reform of fiscal federalism arrangements,
spending constraints at all levels of government and social security, as well as revenue measures.” (p.
1) To ensure credibility of consolidation, IMF staff advised “adopting a rule-based multiyear fiscal
framework” (p. 1). Moreover, the IMF staff observed that “growth-enhancing structural reforms
should be pursued vigorously” (p. 1). Labor market policies should focus on increasing labor market
participation, wage flexibility, and reduce the tax wedge on wages (p. 28).
By 2012, “the outlook is clouded by slow growth across Europe. A recession in Belgium is already
underway” (p. 36). In the intermediate-term, the 2011 Article IV consultation focused on “additional
consolidation efforts [being] required to achieve structural balance by 2015” (p. 37). Where
“additional consolidation effort should be centered on containing expenditures through entitlement
reform and streamlining public sector employment, as well as on broadening the tax base” (p. 26).
IMF staff advised that “measures should focus on the expenditure side, especially further pension
reforms that would further raise the effective retirement age; measures to contain the growth rate of
health care spending; and curtailing public sector employment” (p. 37). Finally, a burden-sharing
agreement between different levels of government” that would impose spending caps was suggested
(p. 27).
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Bulgaria
With “one of the highest growth rates in Europe,” IMF staff observed “Bulgaria’s economy
continued to perform well, helped by strong policies” in 2008” (p. 4). But “at the same time, external
and internal balances widened further” (p. 4). The 2008 Article IV consultation recommended that
“fiscal policies should aim at maintaining comfortable surpluses” (p. 4). The report stated that “a
significant slowing of expenditures will also be necessary in later years” (p. 5). IMF staff expressed
concerns about labor markets over-heating, resulting in deteriorating competitiveness (p. 4, 7).
“Labor market overheated, with wage growth exceeding 20 percent, and annual inflation reached 12
percent” (p. 4). IMF staff argued that a “moderation in unit labor costs increases is essential” (p. 5).
The consultation did not provide specifics on how to slow wage growth, and “the [Bulgarian]
authorities reacted that the labor market was very flexible, and that wage growth would slow rapidly,
when the economy slows”9 (p. 36).
The economic “boom came to an end in the fourth quarter of 2008” when “a sharp adjustment in
capital inflows led to a contraction of domestic demand… while recession in Bulgaria’s trading
partners caused a drop in exports” (2010: p. 4). The 2010 Article IV consultation discussed the need
to shift growth from domestic demand to export (p. 13). For export-led growth to happen, “wage
growth… will need to be moderate” (p. 14). The report noted that “authorities were confident that
this [would] happen, arguing that the labor market was flexible” (p. 14). Moreover, containing wage
growth in the public sector was seen to “help limit economy-wide wage growth and help
competitiveness” (p. 19). IMF staff provided a number of recommendations for fiscal policies
supportive to export-led growth: 1) urgent reforms of the social pension systems, including slowing
pension benefit increases, increasing retirement age or minimum years of contribution, addressing
underreporting of insurable income, and improve management of disability pensions; 2)
comprehensive health care reforms to improve efficiency and quality, including rationalizing inpatient care; 3) rationalizing public administration and making it more efficient and effective; 4)
containing public wage growth; and 5) a renewed push for privatization (p. 18-19). Education
reform should focus on “improving quality of education, promoting life-long learning, and
providing equal access to education” (p. 24). Finally “any tax rate reductions [such as lowering the
social security contribution rates] would need to be compensated by further expenditure cuts” in the
medium term (p. 17).
The 2011 Article IV consultation focused on “accelerating on-going reforms to regain growth
potential, create jobs, and address aging-related pressures.” (p. 1). IMF staff projected that a total
adjustment of 2 percent of GDP between 2012 and 2014 would be needed to reach the mediumterm fiscal objective of a 0.6 percent deficit (p. 13-14). IMF staff argued that “consolidation hinges
on continued expenditure restraint,” achieved through “tight spending ceilings, and “extension of
the wage and pension bill freezes” (p. 14). staff also argued that “strong spending control should be
accompanied by reforms” (p. 14). Recent health care reforms “should be complemented by steps to
rationalize the hospital sector and improve information systems” (p. 14). Pension reform should
include “further increases in the retirement age and service period, “change to a less generous
indexation of benefits,” “phas[ing] out of overly generous early retirement pensions,” and “raising
second pillar contribution rates” (p. 14-16). Finally, public administration reforms should be
expanded to the municipal level and include workforce reduction and introduction of performance9 The unsustainable wage growth did slow subsequently, and in the 2011 report the IMF staff noted that “wage growth
had moderated in the face of rising unemployment, and is now broadly in-line with productivity growth” (p. 10).
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based remuneration without increasing the overall payroll envelope (p. 14). Education policies
should address long-term youth unemployment “through active coordination of tertiary and
vocational education with employers’ needs (especially in tradeables sectors) and apprenticeships”
(p. 10).
Cyprus
The 2009 Article IV consultation warned that “the steady deterioration in competitiveness threatens
medium-term growth and viability” (p. 1). To increase competitiveness, IMF staff recommended
structural reforms, such as eliminating or better targeting, “the inflation-indexed wage adjustment
mechanism (COLA),” (p. 1, 24) and “the streamlining of red tape and bureaucracy, … supported by
a bloated civil service” (p. 21). By 2009, “the global crisis ha[d] started to affect Cyprus. The
overheating of the economy in 2007-08 ha[d] given rise to vulnerabilities.” (p. 1) In order to meet
the objective of medium-term budget balance and to avoid an unsustainable public debt-deficit
cycle, “a ½- ¾ percent a year public consumption-based fiscal adjustment would be necessary.” (p.
1) IMF staff argued that “a spending-based consolidation is appropriate as it would be more durable,
given international experience” (p. 16). Specifically, “the reduction of the wage bill – a third of total
spending – should be a key priority” (p. 17). “This would require hiring and wage controls and a
more efficient use of civil servants” (p. 17). Flexicurity in the public sector and reducing lump sum
payment to public retirees were also proposed (p. 23, 18). Moreover, further pension reform
measures for all workers were suggested, such as raising the retirement age, and indexing benefits to
prices (p. 18). “To further enhance social cohesion and protect the budget, social support measures
should be targeted to reach the truly needy” (p. 17). Finally, “staff emphasized that it would be
critical that the temporary stimulus measures be reversed when the economy recovers” (p. 17).
The 2011 Article IV consultation identified two key challenges: “to put in place a large and credible
fiscal consolidation” and “ensure that banks and their supervisors are well-prepared to respond to
possible adverse developments” (p. 1). A fiscal goal identified in the 2011 report was to bring the
deficit below 3 percent of GDP by 2013 (p. 24). IMF staff and Cyprus authorities agreed on fiscal
savings of 6.6 percent of GDP over 2011-13 (p. 18). Staff recommended that “additional measures
need to be adopted… to balance the budget in 2014” (p. 19). “Measures should focus mostly on
expenditure reductions, which” according to IMF staff “are more durable and reliable than revenue
increases” (p. 24). Priority areas identified for consolidation were “containment of public sector
wages and benefits and further improvements in the targeting of social transfers…, as well as a
moderate increase in VAT rates” (p. 24). IMF staff also pushed for structural reforms to increase
competitiveness. “The current crisis is an opportunity to undertake significant reform or even
eliminate the cost of living adjustment system in the public sector” (p. 22). COLA reforms in the
public sector were “expected to lead to reduced use of the COLA in the private sector” (p. 22-23).
Czech Republic
Following three years of rapid growth, the Czech economy was expected to slow sharply in 2009 (p.
3). In the 2008 Article IV consultation, IMF staff noted that “with low government debt and limited
macroeconomic imbalances, there would be room for a discretionary fiscal stimulus under a more
adverse scenario” (p. 4). But “over the medium term, the momentum of reforms will need to be
restored to address long-term challenges and raise potential growth” (p. 4). The report mentioned
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improving work incentives through reforms of the labor market and the tax-benefit system, but did
not provide specifics (p. 4). Monetary policy was viewed as being on the right track. “With inflation
likely to fall below the CNB’s target of 3 percent…, scope exists for further easing” (p. 17). IMF
staff agreed with the new inflation target of 2 percent in 2010, noting it aligns with the ECB’s
inflation target, and would help the Czech Republic meet the Maastricht criteria for euro adoption
(p. 19).
The 2010 Article IV consultation focused on “the urgency of fiscal adjustment” highlighted by the
crisis (p. 4). The report states: “During the years of rapid economic growth the opportunity for more
fundamental fiscal consolidation was missed” (p. 4). Moving forward, “fiscal consolidation… should
focus on both expenditure and revenue measures.” But IMF staff noted “international experience
suggests that expenditure-based fiscal consolidations tend to be more durable” (p. 5). Specific
recommended expenditure measures were: “reorganizing public institutions and positions would
help reduce the overall wage bill;” “introducing means-testing for social benefits,” and “improve
efficiency of public services.” Revenue measures included “eliminating tax exemptions and
loopholes” (p. 5). IMF staff stressed that “rationalizing mandatory expenditures and the generous
welfare system is unavoidable” (p. 5). The staff recommended pension reforms that would “better
link contributions to benefits and further increas[e] the effective retirement age;” “a tightening of
the criteria for disability pensions,” and “moving to a fully funded second-pillar private pension
scheme” (p. 5, 33). The staff found that “fundamental health care reforms are equally important” (p.
5) and recommended “reduc[ing] the broad coverage of publicly provided and insured services and
allow greater scope for private sector provision of health services;” and introduc[ing] voluntary
insurance, personal health accounts, and choices in health benefits plans to ensure long-term
financial sustainability of the health care system” (p. 6).
The staff predicted that “the adverse effects of the crisis are likely to be long lasting,” and argued
that “swift implementation of growth-enhancing structural reforms becomes critical” (p. 6).
Specifically, “promoting work incentives through changes to the tax-benefit system, improving labor
market flexibility and the quality of education, and further reducing barriers to business entry and
exit” (p. 6). Finally, a shift in monetary policy was recommended. “The easing cycle of monetary
policy seems to have come to an end. The supportive monetary policy stance… should shift to
tightening as the recovery gathers momentum” (p. 4).
By 2011, IMF staff noted that “the Czech economy ha[d] rebounded from the downturn owing to
its strong fundamentals and the global recovery, but faces a number of policy challenges” (p. 18).
Therefore, the IMF argued that “wide-ranging structural reforms are needed to buttress growth” (p.
19). Specific structural reforms should focus on “increasing labor participation and labor market
flexibility; enhancing efficiency in higher education, R&D, and the public sector; and further
improving the business climate” (p. 19). Moreover, “staff urged the authorities to identify and put in
place a credible package of medium-term consolidation measures… In staff’s view, rationalizing
entitlements and the generous welfare state is unavoidable to ensure durability of fiscal adjustment”
(p. 11). The consultation report reiterated the consolidation measures proposed in the previous
consultation. In terms of monetary policy, IMF staff recommended “maintaining accommodative
monetary policy until the negative output gap narrows” (p. 1). but warned “a rise in inflation
expectations or a rapid improvement in labor markets would warrant earlier action” (p. 19).
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Denmark
The 2008 Article IV consultation mostly praised Denmark for its economic policies, using language
such as “steady hand on fiscal policy,” “responses to the financial crisis were innovative, forceful,
and timely,” “agreed increase [in financial sector surveillance] is welcome,” “generous provision of
foreign aid is welcome,” and “the proposed 2009 budget strikes a good balance between allowing
growth to slow and cushioning it from a severe recession” (p. 18-9). The consultation provides three
specific recommendations: 1) “upfront action is needed to ensure fiscal sustainability” to close the
long-term fiscal gap; 2) “tax reform needs to be more comprehensive” and 3) user fees, indexation
of the tax on residential property and reducing the deductibility of mortgage interest should be
considered (p. 18-19).
The report noted that “the 2007 cyclical slowdown was welcome given record low unemployment
and fast rising wages, but the global crisis has increased the risk of a hard landing” (p. 18). The main
concern of the consultation was that recent trends relating to competitiveness were unsustainable.
“Wage growth needs to slow if firms are to rebuild profitability and stem the decline in Denmark’s
export share” (p. 18). Due to concern about competitiveness, IMF staff stated that “the case for
further discretionary easing is weak because some slowing is needed to stop the decline in
competitiveness” (p. 1).
In the 2010 Article IV consultation, the emphasis on recommendations had changed to the longer
term. The report begins with stating that “Denmark is recovering from a deep recession” (p. 1).
Nonetheless, the main labor market recommendations related to addressing the “looming labor
supply pressures” (p. 26). IMF staff recommended “phasing out early retirement schemes and
reforming sickness and disability leave benefits” in order to increase labor supply (p. 26).
Furthermore, staff recommended increasing labor productivity growth by “reforms that intensify
competition and accelerate firm exit and entry;” as well as, “measures that increase the return to
education, at higher skill levels in particular” (p. 26). Fiscal policy recommendations focused on
“embark[ing] on a multi-year consolidation program;” “bringing down the deficit to below the
Stability and Growth Pact’s ceiling;” and “reducing public consumption growth” (p. 30). Finally, the
report noted that “the peg to the euro continues to service Denmark well,” but recommends
eventual adoption of the euro (p. 29).
Estonia
The 2008 Article IV consultation report predicted a “severe recession” for 2009 (p. 24). The key
fiscal challenges, identified by IMF staff, were “to rein in the budget deficit despite the recession and
restore a sustainable fiscal stance over the medium term” (p. 22). Moreover, IMF staff observed that
“large expenditure increases over the past two years [were] unsustainable and [left] little room for
countercyclical measures which would anyway be of only modest impact” (p. 3). Market flexibility
was seen as “critical for the restructuring needed to support medium-term convergence” by IMF
staff (p. 24). The staff supported legislation to increase labor market flexibility, but “advised that the
fiscal costs of social protection be clearly assessed and accounted for, and expressed concern about
possible adverse labor supply effects” of strengthening social protection by increasing
unemployment benefits (p. 24).
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By early 2010, “the economy [was] contracting sharply,” and unemployment was projected to reach
16 percent (p. 5). Fiscal policies in the 2009 Article IV consultation focused on meeting the
Maastricht criteria for euro adoption in 2011. IMF staff argued that “the benefits of euro adoption
outweigh the mildly procyclical effects of fiscal tightening during the crisis” (p. 3). The staff
predicted that the “euro adoption by itself is unlikely to trigger any major change in the pace of
recovery,” and recommended that “the focus… be on restoring economic stability and laying the
foundations for more balanced growth” (p. 3). Much of the adjustment would come from the
revenue side, since “the need to protect social safety nets limits the room for spending cuts” (p. 4).
Specific tax measures mentioned were to eliminate “poorly targeted exemptions,” review corporate
income tax deferral rules, and enhance use of environmental and property taxes,” and “increase the
VAT rate” (p. 4).
On January 1, 2011, Estonia joined the euro area. The 2010 Article IV consultation report released
in January 2011 noted that “Estonia has the distinction of being the only EU country, aside from
Sweden, whose fiscal deficit does not exceed the Maastricht limit” (p. 1). The staff attributed
Estonia’s success with “authorities’ policies hav[ing] largely been in line with Fund Advice” (p. 9).
Looking forward, IMF staff agreed with “authorities’ medium-term goal of restoring a balanced
budget” (p. 1). “This will imply reducing expenditures by about 3 percent of GDP and thus bringing
Estonia’s public spending closer to its pre-crisis level” (p. 10). With an unemployment rate estimated
at 17.6 percent in 2010, IMF staff recommended “addressing skill mismatches through continued
progress in enhancing the education system” (p. 16; Table 1). EU-structural funds were envisioned
as a source for funding. “EU structural funds can continue supporting life-long learning, increases in
labor mobility, and needed infrastructure investment” (p. 1).
The 2011 Article IV consultation emphasized sustainable growth. This would “entail enhancing
Estonia’s attractiveness for FDI, addressing skill mismatches, and increasing human capital” (p. 18).
The report noted that “overall unemployment, while declining, remains high with long-term
joblessness on the rise” (p. 4). Moreover, “long-term unemployment has continued rising reflecting
jobs-skills mismatch” (p. 5). The consultation identified “emerging labor market tensions” of labor
shortages and increases in manufacturing job vacancies, despite double-digit unemployment (p. 16).
IMF staff agreed with the authorities approach of reducing skill mismatches through vocational
education and training programs and a new one-stop IT platform. (p. 16) Furthermore, staff
recommended foster[ing] development of human resources in technical fields as well as to attract
highly-trained individual from abroad” (p. 17).
Finland
The 2008 Article IV consultation stressed long-term fiscal sustainability. “Containment of
government spending is a priority” due to aging of the population (p. 13). IMF staff stated that “a
permanent improvement in the structural primary balance after 2011 of at least 1½ percent of GDP
is needed to stabilize net public debt” (p. 19). Where “the bulk of the needed adjustment should rely
on containment of spending” and improved efficiency in the government sector (p. 19). To contain
demand for public services and increase competition in their provision, IMF staff recommended
“increase[ing] recourse to user charges for public services” and “contracting out, outsourcing, and
well-designed public-private partnerships” in care for the elderly and children (p. 14). To address
tight labor markets, IMF staff recommended structural reforms in the form of “labor-income tax
cuts that promote labor force participation” (p. 19). However, staff advised against the planned cut
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in the VAT rate on food (p. 19). Other recommendations mentioned, but not discussed in detail,
were “steps to strengthen activation of the unemployed and partially disabled, shorten time spent in
tertiary education, improve training and reduce labor market mismatches, and lessen poverty traps”
(p. 20).
The 2008 consultation report stated that Finland was among the best EU performers, but noted the
economy faced important challenges (2008: p. 1). In 2009, the economy was “amid a massive
economic downturn,” (2010: p. 21) with GDP falling almost 8 percent in 2009 (p. 1), and the 2010
Article IV consultation report observed that “Finland ha[d] been dealt a severe blow by the global
crisis”10 (p. 1). Therefore, IMF staff recommended against “ambitious fiscal tightening in 2011,” and
“advised a more measured pace of consolidation” (p. 1). Beyond 2011, staff recommended “an
adjustment of about ½ percent of GDP per annum” to close the sustainability gap by 2020 (p. 28).
The staff wrote: “international evidence generally indicat[es] that expenditure-based consolidations
have been more successful” (p. 26). Specific expenditure retrenchment measures mentioned were
“increase in effective retirement age and measures to restrain growth in demand for health- and
long-term care,” “higher tuition fees and a reduction of student grants in favor of loans for tertiary
education,” and “creating incentives for reducing time to graduation” (p. 26).
France
The 2007 consultation report forecasted “GDP growth of 1.6 percent in 2008, with a recovery in
2009” (p. 1). However, the 2009 Article IV consultation report observed that “a severe recession hit
France in 2008” and forecasted “real GDP to contract by 3 percent” in 2009 (p. 5). Most of the
consultation assessed the economic status of the French economy, and discussed fiscal consolidation
and labor market reform. IMF staff stated that “historical experience indicates that successful fiscal
consolidations were often launched in the midst of economic downturns or the early stages of
recovery” (p. 20, no references were provided). Therefore, IMF staff recommended a “decisive
implementation of a clear consolidation strategy at all levels of government [to] be anchored in the
2010 budget” (p. 20). Longer-term reforms should “strengthen financial stability, safeguard fiscal
sustainability and deepen the reform of labor and product markets” (p. 3). Labor market
recommendations centered on labor market activation and training policies, minimum wage
moderation, and raising the legal retirement age (p. 4).
The 2010 Article IV consultation “focused on the need for credible consolidation to safeguard fiscal
sustainability without endangering the fragile recovery” (p. 1). Introducing multi-year budgetary
frameworks and a fiscal rule on the structural government balance with built-in debt-brake
mechanism would strengthen the credibility of consolidation (p. 19). IMF staff wrote that
“entitlement reforms in the pension and health care systems are key” for credible fiscal
consolidation (p. 30). In order to increase growth, IMF staff also recommended “policies to
encourage wage moderation, foster research and development, promote innovation, improve
competition, and create favorable conditions for businesses to grow” (p. 24). In order to avoid a rise
in structural unemployment, “staff suggested to consider temporary hiring incentives (in the form of
credits for new hires or lower payroll contributions),” a unified job placement agency, improved
training opportunities, and strict enforcement of job-search requirements (p. 26). The report further
10 Finland, real GDP declined by 8.5 percent in 2009, according to IMF World Economic Outlook, Table A2.
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noted that “introducing greater competition in health-related services and professional services…
would be welcome” (p. 29).
In the 2011 Article IV consultation, the focus was on reducing the debt: “Achieving the fiscal targets
and further entitlement reform are important to lower the public debt to 60 percent of GDP by the
middle of the next decade” (p. 38). IMF staff argued that “securing long-term fiscal sustainability
will require deeper reforms of key pension and health care parameters” (p. 21). Pension and health
care reform recommendations concentrated on further increasing the legal retirement age, targeted
tax incentives to increase senior workers’ labor force participation, continued efficiency gains in
health and long-term care, and tighter budget constraint on spending by social security entities (p.
16, 21). To attain fiscal sustainability, IMF staff encouraged the adoption of a fiscal rule that would
include multi-year expenditure ceilings, minimum annual revenue measures, and restriction of new
tax measures (p. 19). Tax reform recommendations were reducing the high labor-tax wedges, make
earned income tax credits more generous for older workers and women with school-aged children,
and lowering the statutory rate of corporate taxes (p. 34-5). Moreover, gradual elimination of VAT
exemptions and incentives, introduction of a carbon tax, higher revenue from fuel, alcohol and
tobacco taxation, and hikes in recurrent property taxes were also mentioned (p. 17). The section on
labor market reform reiterated most of the recommendations from the 2010 consultation, but added
easing employment protection and reducing the duration or level of unemployment benefits, and
phasing out pre-retirement benefits to the list of reforms (p. 35-6).
Germany
The 2008 Article IV consultation report predicted that “Germany faces the prospect of a sizeable,
and possible extended, economic downturn” (p. 1). IMF “staff argued for a more ambitious stimulus
now” (p. 1). To ensure long-term public finances sustainability, the staff recommended
recommitment of a fiscal rule that “limits the structural budget balance to close to zero” at federal
and state level (p. 27). One identified risk to fiscal sustainability was health care costs due to the
aging of the population, and further cost savings measures were proposed, including rationalization
in pharmaceutical expenditures and efficiency-enhancing competition (p. 28, 31).
In the 2010 Article IV consultation, German authorities stated they “are firmly committed to
meeting their medium-term fiscal targets” (p. 18). IMF analysis found that in order to achieve these,
annual structural adjustment of ½ percent of GDP in 2011-13 and ¾ percent of GDP through 2016
would be required (p. 18-9). IMF staff argued that “expenditure-based consolidations tend to be
larger and more enduring,” (p. 19) and proposed a fiscal adjustment strategy which focused on
expenditures, including “examination of subsidies,” strict adherence to agreed-upon “adjustment
mechanisms for pension benefits and the gradual rise in the retirement age,” and “limiting spending
on non-generic pharmaceuticals” (p. 19). Increasing “contribution rates to the unemployment
insurance” was also mentioned (p. 19) Moreover, “should revenue measures have to be part of the
solution, eliminating exemptions in income and VAT taxes should have priority” (p. 32). Labor
market reform recommendations focused on “increasing labor market flexibility through decreasing
both legal and labor-court based employment protection” (p. 27).
In the 2011 Article IV consultation, IMF staff viewed “the proposed consolidation path as
appropriate” (p. 25). But they cautioned that the “pace of consolidation be slowed in case of a
substantial negative shock to growth” (p. 25). To rebalance public finances in the longer term, IMF
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staff recommended increasing labor force participation by introducing “in-work credit programs for
the elderly and secondary earners,” “an earned income tax credit for low-income,” and “tax reform
that would move to individual taxation of married couples” (p. 27). IMF staff stated that “corporate
taxes are the most harmful [among all taxes] to economic growth,” and proposed “abolishing the
local level trade tax (p. 28). The recommended tax cuts would be paid by “eliminating concessions in
VAT and raising property and inheritance taxes” (p. 28). On the expenditure side, “elimination of
the unconditional child transfers” and other unspecified social entitlements were mentioned (p. 28).
The consultation also advocated for educational reform and physical investment and innovations (p.
39). The staff agreed with German authorities that there is a need for “more widespread early
childhood care and education,” as well as “reorienting vocational training” (p. 11).
Greece
In the 2009 Article IV consultation report, IMF staff predicted that “Greece’s growth decline from
peak to trough would still be milder than for the euro-area as a whole…Staff project[ed] some
recovery in the late 2010” (p. 11). IMF staff warned that “fiscal consolidation cannot be postponed;”
(p. 34) and argued for a “coherent sustained fiscal adjustment plan” and recommended “annual
adjustment of about 1½ percent of GDP in permanent measures beginning in 2010 to place public
debt on a declining path” (p. 23). On the revenue side, IMF staff recommended “focus[ing] on
income that escapes taxation… by phasing out exemptions and deductions; taxing the self-employed
and the informal sector; and increasing further selected excise taxes” (p. 24). On the spending side,
“wage moderation (extended to pensions) and restrictive hiring policies” were proposed “to curb the
fast growing wage bill” (p. 24). Moreover, “Greece urgently needs further pension reform” and
“staff noted that parametric reforms remain essential to ensure that pensions of next generations can
be paid and should not be postponed” (p. 26). Addressing unemployment, IMF staff wrote: “more
government spending cannot be used as a substitute for labor reforms” (p. 30). Specific labor market
reforms mentioned were to “promote a social contract focused on employment growth through
strong wage moderation;” expand part-time work opportunities;” and “reduce employment
protection” (p. 33). The IMF did not conduct Article IV consultation with Greece in 2010 and 2011.
Hungary
The 2008 Article IV consultation emphasized fiscal consolidation to put the government debt-toGDP ratio on a downward path and inflation targeting (p. 5). “Monetary policy should aim to
reduce CPI inflation to the 3 percent target over two years” (p. 3). The report stated that “further
consolidation [would be] required” (p. 12). “Staff supported the introduction of a rules-based fiscal
framework” (p. 15). Moreover, “to boost potential GDP growth, a smaller size of government…
would help” (p. 3). To reduce the ratio of government spending to GDP, “further reforms of the
pension, health, and education sectors are necessary” (p. 16). Specific recommendations were
“further increase in the effective retirement age,” “improve the governance of hospitals and increase
efficiency by adopting a sound regulatory framework” in health care, “expanded performance-based
financing and greater autonomy of higher education institutions,” and better targeting of social
transfers by “increasing means testing and tightening eligibility criteria” (p. 16).
In the 2010 Article IV consultation, “staff advocated to focus on expenditure rationalization and
structural reforms.” (p. 1) “A credible medium-term fiscal adjustment program to safeguard fiscal
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sustainability could set off a virtuous cycle of lower risk spreads, reduced public and private
financing costs, and, ultimately, higher growth” (p. 1). Areas identified for consolidation included
“poorly targeted social benefits and price subsidies” (p. 17).
The 2011 Article IV consultation noted that “Hungary has yet to recover from the previous crisis
but is now facing renewed pressure” (p. 15). But “despite the weaker growth outlook,” IMF staff
argued that “the planned fiscal tightening is necessary” (p. 16). Moreover, “the constitutional
mandate to maintain public debt below 50 percent is commendable” (p. 16). “Staff expressed
concerns about the underlying composition of fiscal policy” (p. 8). To “minimize adverse effects on
medium-term growth prospects and the poor,” IMF staff proposed “eliminating special sector
levies, revisiting elements of the flat tax, and rationalizing related wage and compensation reforms”
(p. 8). “Staff also raised broader concerns about long-term growth,” and “emphasized obstacles
regarding investment and labor participation as particularly worrisome” (p. 14). In terms of
monetary policy, “the MNB’s tightening bias is justified” (p. 1).
Ireland
By 2009, “the Irish economy [was] in the midst of an unprecedented economic correction” (p. 28).
The 2009 Article IV consultation report stated that ”fiscal consolidation has begun – and requires a
sustained effort” (p. 1). Fiscal consolidation focused on expenditure measures. IMF staff argued that
“the international evidence is clear: fiscal adjustment should focus on expenditure cuts” (p. 26).
Fiscal recommendations included “the public wage bill and the scope of social welfare programs” (p.
26). Staff wrote: “social welfare expenditures must better target the vulnerable,” (p. 26) and “the
authorities recognized that it will be necessary to articulate a strategy that moves away from
universalism in social welfare to one that relies more on targeting and incentives” (p. 26). Proposals
included “earned income tax credits,” “indexing of benefits to more appropriate price baskets,”
“more nuanced minimum wage structure,” and “reduce social transfers” (p. 26). A recently adopted
wage freeze and pension levy reduced the effective wage by 7.5 percent in the public sector, and the
staff recommended that “further ratcheting down of the public pay structure and employment
levels” was needed for sustainable fiscal consolidation (p. 26, 29). On the revenue side, IMF staff
recommended “limiting tax relief on mortgage interest,” “raising social security contributions,” as
well as the possibility of introducing a property tax (p. 27).
The IMF staff supported the Irish authorities’ response to the economic crisis in the 2010 Article IV
consultation. “Staff supports the appropriately ambitious fiscal consolidation plan through 2014 but
cautioned that the required adjustment may be larger than projected” (p. 24). IMF staff observed
that “this is also a good moment to establish a strong fiscal framework. A medium-term fiscal
framework incorporating expenditure ceilings is a valuable management tool” (p. 27). However, the
2010 consultation provided few specific recommendations for further consolidation. Staff and
authorities agreed that expenditures saving will remain central to achieving consolidation, and
“entitlement reforms could generate further savings” (p. 25).
Italy
In the 2008 Article IV consultation, IMF staff argued for the budgeted fiscal consolidation being
delayed. “The target deficit of 2.1 percent of GDP for 2009 is no longer in line with the
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deteriorating macroeconomic environment” (p. 3). Still staff emphasized that “the current crisis
should not eclipse the need for bolder action to address longer-term fiscal challenges.” (p. 25)
Specifically, further reforms to the welfare system, including “future increases in the retirement age
(especially for women)” (p. 25). IMF staff also recommended structural reform in the labor market,
retail trade and services and the energy market. Labor market reform “broadening and streamlining
the social safety net, in particular the unemployment benefit system,” financed by “reducing
replacement rates and spending on active labor market policies, and by eliminating…tax reductions
on overtime/bonus pay” (p. 31). Finally, reductions in labor taxation should be “combined with
modification of the wage bargaining framework that increase the scope for firm-level bargaining” (p.
31).
By 2010, “the recovery [was] expected to be modest” (p. 11). Moreover, “the staff’s medium-term
scenario is less optimistic than the authorities” (p. 16). In the 2010 Article IV consultation, IMF staff
argued that “the planned consolidation is not ambitious enough,” and “would still not deliver the
medium-term objective (MTO) of structural balance” (p. 16). Medium-term fiscal consolidation
“should be based on rationalizing current spending” (p. 22). IMF staff endorsed the authorities’ plan
but warned that “consolidation should also include strict adherence to budget targets” (p. 22). In
order to bring the debt-to-GDP ratio to 60 percent, “additional savings from age-related
expenditures (equivalent to cutting nominal pensions by 5 percent over the long term) would still be
needed” (p. 21). Further pension reform should include “revisiting the current high replacement
rates and increasing the age of retirement age” (p. 21). IMF staff reemphasized the need for “a
second generation of labor market reforms” (p. 27, 30). They proposed that “the public sector
should take the lead in decentralizing wage bargaining arrangements” to take regional differences
between the north and the south into account (p. 27).
The 2008 consultation report projected output “to contract by about ½ percent in 2008 and 1
percent in 2009” (p. 3). In fact, real GDP declined by 5.2 percent in 2009. The 2010 consultation
report noted that “although the worst effects of the global financial crisis on Italy’s economy have
mostly passed, key vulnerabilities remain” (p. 29). The 2011 consultation noted that “Italy suffered
one of the largest output contractions in the euro area…and is experiencing one of the slowest
recoveries” (p. 4). In the 2011 Article IV consultation, IMF staff stated that “fiscal consolidation is a
prerequisite for sustainable growth…but only sustained growth will reduce the burden of public
debt” (p. 1). Fiscal consolidation “should be achieved by rationalizing public expenditure and
reducing tax evasion,” (p. 1).Staff predicted “containing public sector wages could generate positive
spillovers for the private sector” (p. 30). The staff also recommended acceleration of pension
reform, including increasing women’s retirement age from 60 to 65 years (p. 20, 23). To increase
potential growth “comprehensive structural reforms in the areas of labor and product markets and
public administration should be promptly implemented” (p. 1). Staff acknowledged that “the partial
liberalization in the labor market may have undermined investment in human capital and
innovation,” (p. 27) and recommended “harmonizing labor contracts and legislation between
protected and unprotected workers” (p. 27). Specifically, “a more decentralized wage bargaining
system” (p. 27). In the 2011 report, the staff also noted that Italy’s “educational attainment and
quality of education are among the lowest across OECD countries” (p. 28). The report did not offer
any specific recommendations on education, other than noting that better education should be
ensured in the South (p. 26). Finally, the staff noted “combating organized crime, corruption, and
related money laundering, should remain a priority” (p. 31).
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Latvia
The IMF conducted one Article IV consultation (in 2010) with Latvia in the study period. Latvia had
experienced a severe economic downturn with “an 18 percent contraction in 2009 and substantial
volatility” (p. 4). The 2010 consultation focused on “restoring growth and reducing unemployment,”
“completing the fiscal adjustment to meet the Maastricht criteria,” “resolving the private sector debt
overhang,” and “structural reforms to improve competitiveness and raise potential growth” (p. 23).
Reducing unemployment was mentioned as a means to increase growth: “Reducing unemployment
further, to around 10 percent, could raise growth by an additional 2-3 percent” (p. 23). IMF staff
recommended structural reforms to reduce unemployment, “given constraints to expansionary
macroeconomic policy” (p. 25). Specific reforms discussed in the consultation were: 1) “minimum
wage cuts [to be] combined with labor tax cuts for the low-paid;” 2) “in the short run, increasing
domestic demand”… through debt restructuring and strengthening of the financial system; and 3) in
the longer term, “improving educational performance” (p. 25). IMF staff warned that “there is a risk
that hysteresis effects could raise the natural rate and make higher unemployment permanent” (p.
25).
The staff emphasized the need for completing the fiscal adjustment, while acknowledging difficulties
in attaining goals of debt sustainability. For instance, “the government’s pension cut [of 70 percent
for working pensioners] was ruled unconstitutional for violating pensioners’ legitimate expectations”
(p. 28). ”Staff estimate[d] a further 6 percent of GDP in adjustment remains necessary,” to meet the
Maastricht deficit criteria by 2012 (p. 29). The staff argued that “while continued adjustment might
worsen the recession, delaying it would…. undermin[e] the euro adoption strategy” (p 29). Current
expenditure cuts were preferred as “international experience suggests [they] generate more
sustainable adjustment” (p. 29) “But revenue measures may also be required” (p. 39). Current
expenditure cuts identified were pensions, subsidies and transfers. “Staff noted large past increases
in pensions as well as subsidies and transfers, and welcomed efforts to reexamine the budget for
additional savings” (p. 39).
Lithuania
In 2009, “the Lithuanian economy [was] undergoing a painful adjustment” (p. 3). In the 2009
Article IV consultation, “staff advocated a sizeable fiscal consolidation to ensure that public debt is
sustainable” (p. 1). Where, “fiscal consolidation should be guided by the need to… sustainably bring
spending to more affordable levels, primarily through savings in social benefits and public sector
wage bill,” “broaden the tax base,” “strengthen fiscal institutions,” and “protect the most vulnerable
including through rationalization of generous benefits” (p. 3). The staff noted that “the scope for
savings appear to be greatest in social benefits and civil service pay” (p. 14). They also recommended
“to bring [pension] benefits in line with contributions and restore full funding of the second pension
pillar,… gradually increase retirement age,… tighten eligibility for child, disability and sickness
benefits, and decrease the term of maternity benefits to international levels” (p.14). The staff also
found there was “scope for savings in the education sector… with a very low student-teacher ratio.”
(p. 14). Along with spending cuts, the staff advised “it would also be prudent to raise the tax-toGDP ratio” (p. 14). IMF staff acknowledged that “in the context of such a large scale economic
adjustment, it will be important… to provide space for social safety nets” (p. 15).
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The 2011 Article IV consultation discussed how to enhance prospects for euro adoption in 2014 (p.
1, 14). IMF staff made the case for “additional fiscal consolidation [to] secure sound public
finances;” (p. 14) and estimated that “some 5½ percent of GDP in additional measures… [were]
required” (p. 15). Specific recommendations included reform of the social security system, increasing
tax revenues, such as introducing a real estate tax on personal property and an annual car tax, and
structural reforms in the education and health sectors (p. 17-18). Specifically, “reform of the social
security system should be assigned the highest priority,” and recommendations included “limiting
the duration of [parental] benefits, introduce a benefit cap… [and] tighter certification of sickness
and disability” (p. 17). Pension reform recommendations were similar to those of 2009.
Furthermore, IMF staff proposed “consolidation within the dense hospital network and a greater
reliance on primary care, out-patient services, and patient copayments” (p. 18). The unemployment
rate was projected to rise to 18 percent in 2010, (Table 1) and staff observed that “the high level of
unemployment calls for decisive policy action” (p. 27). The staff found that “proposals in parliament
to expand fixed-term contracts, ease dismissal requirements and allow greater flexibility in overtime
[would] further increase labor market flexibility and encourage firms to hire” (p. 27).
Luxembourg
“Luxembourg face[d] its most severe recession since… the 1970s,” (p. 1) and the 2009 Article IV
consultation recommended “automatic stabilizers [be] allowed to function fully” (p. 19). However,
“over the medium and long term adjustment is necessary to foster fiscal sustainability” (p. 18).
Specific recommendations were reconsideration of “full inflation indexation of wages and benefits,”
“address aging-related challenges,” and “far-reaching reforms of the public pay-as-you-go pension
system” (p. 1, 20).
To support medium-term fiscal adjustment, the recommendations in the 2010 Article IV
consultation focused on establishing “a medium-term fiscal framework that, supported by mediumterm targets and binding multi-year expenditures, would … safeguard fiscal sustainability” (p. 16). In
the medium term, “ensuring fiscal stability requires…substantive pension reform” (p. 4). Specific
reform measures mentioned were “gradually increasing the effective and statutory retirement age,”
discourage early retirement, and “improving the alignment of benefits and contributions” (p. 16).
In the 2011 Article IV consultation, IMF staff expressed concern that fiscal consolidation comes
from cap on public investment. “In the medium term, this cap should be replaced with current
spending cuts – notably by rationalizing social transfers and subsides” and “curtailing other current
spending, including increases in the public sector wage bill” (p. 1, 12, 17). The staff reiterated their
recommendations on pension reform to increase the effective retirement age and “limiting pension
benefit indexation” (p. 14). The staff also urged moving up the schedule for the implementation of
approved health care reforms (p. 1, 14). To boost Luxembourg’s competitiveness, IMF staff
recommended “revamping the system of social transfers and subsidies,” address mismatched skills,
and support investment in human capital” (p. 1). Efforts to curtail wage growth included “a need in
the short run to curb automatic wage increases,” while in the longer term authorities were advised to
eliminate wage indexation (p. 1, 17).
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Malta
Because of “Malta’s high vulnerability as a small and very open economy,” IMF staff recommended
“particularly prudent debt management” in the 2010 Article IV consultation (p. 9, 18). The emphasis
of the consultation was on “growth friendly and ambitious fiscal consolidation and… establishing
high value export activities” (p. 1). IMF staff agreed with the Malta authorities’ goal of reducing the
deficit to 1.4 percent of GDP by 2013, but warned that the deficit target may not be met based on
staff’s “conservative growth outlook” (p. 18). IMF staff made the case for additional cost-saving
measures coming from the expenditure side “through personnel retrenchment” and reducing “agerelated public spending” (p. 10). “Additional changes to the current PAYG [pay-as-you-go] system
could include indexing the retirement age to life expectancy, or further lengthening the contribution
period for full entitlement” (p. 12). Moreover, staff mentioned “a timely but gradual introduction of
an additional mandatory and privately funded pillar” (p. 12). The consultation also discussed
proposals to boost labor utilization and productivity by introducing “more flexible arrangements for
part-time work and flexible working practices,” and “linking wage increases to productivity gains.”
To “help satisfy the demand for higher skills,” staff recommended “increasing human capital
through better targeted support, aimed at retaining the highly qualified, as well as improving primary
and secondary education” (p. 7). “Support for higher education should continue,… but
accompanied by rigorous means testing” (p. 7).
Netherlands
In the 2008 article IV consultation report, IMF staff predicted that “with a tightening labor market,
wages are anticipated to accelerate” (p. 1). “Efforts to increase employment are crucial to ease
growing labor shortages, support growth, and address the impact of population aging” (p. 25).
Therefore, “reforms of the tax system, social entitlements, and employment protection, supported
by enhanced activation strategies, are needed to stimulate employment” (p. 25). Specific
recommendations included: reducing the high effective marginal tax rates on second family earners
to promote female employment, targeted tax incentives to induce elderly participation, stricter
enforcement of work availability requirements, tightening reassessment of disability status,
liberalization of strict employment protection legislation (EPL) for regular employment, and
introduction of a funded severance pay system to enhance labor mobility (p. 25). To promote
productivity, the staff recommended removing barriers to entrepreneurship through liberalization of
zoning regulations and rigid shop opening hours (p. 25). To alleviate mounting labor market
pressures from output being above potential, the staff recommended “some withdrawal of fiscal
impulse” (p. 1).
In the longer term, “fiscal sustainability requires a robust surplus permanently higher… around 3
percent of GDP in 2011” (p. 13). Where “adjustment should focus on expenditure retrenchment or
tax base broadening” (p. 1). Due to rising expenditures from an aging population, IMF staff wrote
that “savings require: (i) further pension reform; (ii) additional efforts to rein in health care
expenditures; (iii) enhancements in public expenditure efficiency; and (iv) tighter unemployment
benefits” (p. 24-25). IMF staff expressed repeated concerns over the aging of the population in the
report and wrote “pension reform is key to contain the fiscal costs of aging” (p. 16). Staff
recommended raising the retirement age from 65 to 67 years. To rein in health care expenditures,
staff recommended “an increase in user fees” to moderate healthcare demand growth (p. 16). To
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tighten unemployment benefits “staff suggested lowering [maximum unemployment benefit
duration] to 18 months” from the current 38 months (p. 17).
The 2009 Article IV consultation report observed that “the Netherlands has been dealt a severe
blow by the global crisis,” (p. 5) and IMF staff viewed “the fiscal relaxation [to be] appropriate” (p.
4). But staff expressed concerns over “the significant contribution of recurrent spending to the
ongoing fiscal loosening will prove difficult to reverse when growth picks up” (p. 6). Therefore,
“fiscal adjustment targets for 2012-15 and supporting measures should figure prominently in the
coalition agreement that will emerge from the 2011 elections” (p. 6). Expenditure-based
consolidations were considered “more durable,” and preferred over taxes; where “health and oldage-care reforms are crucial to containing—particularly aging related —expenditure” (p. 6). Specific
recommendations were curtailing aging-related expenditures, including raising the retirement age,
relying more on means-testing and second pillar pensions, increase user fees to restrain healthservices demand, and tighter definition of long-term care entitlements (p. 6). At the same time, labor
market policy recommendations focused on increasing “labor participation, especially for female and
elderly work” (p. 4).
In the 2011 Article IV consultation, IMF staff welcomed the Netherland’s commitment to
consolidation, and advocated adjustment of about ¾ percent of GDP per annum beyond 2015 (p.
23). But staff warned that “historical experience indicates that negative effects on demand from
budget consolidation are likely to be higher when monetary policy is not able to accommodate
tightening, as is currently the case” (p. 21). IMF staff further argued that expenditure retrenchment
should play a key role in adjustment. “Expenditure-based consolidations have generally been more
successful, based on international evidence” (p. 25). “The priority should be reducing the impact of
aging on fiscal expenditures, through increases in the effective retirement age and measures to
restrain growth in demand for health- and long-term care” (p. 25). The focus on the revenue side
should be on “curtailing generosity of MID [mortgage interest deduction]” and shifting taxation
“from labor to less distortionary taxation of consumption and property” (p. 25).
Social policy recommendations focused on “increasing the retirement age,” “overhaul [of] tax and
benefit systems to curtail disincentives to full-time female and elderly work,” “excessive generosity
of unemployment benefits should be pared down,” “fostering research and development (R&D)
expenditure to enhance productivity” (p. 29). Furthermore, IMF staff recommended “stepp[ing] up
investment in roads and railways” to alleviate congestion and spur productivity” (p. 26). Underlying
requirements for investment in infrastructure mentioned by were relaxation of strict zoning
regulation, road pricing, and more competition in the transportation industry (p. 27, 29).
Poland
In 2009, Poland’s economy was doing well. “The economy has continued to expand even as all
neighboring countries and most CEE [Central and Eastern Europe] peers have been mired in deep
recession” (p. 26). The 2009 Article IV consultation supported “cautiously easing monetary policy”
and increasing the deficit limit in the short term (p. 18, 15). The report noted that “having entered
the crisis without serious internal or external imbalances, the authorities were afforded some room
to undertake counter-cyclical measures” (p. 1). However, IMF staff recommended that Poland
adopts “binding multi-year expenditure limits” to bolster confidence in consolidation in the medium
term (p. 15). Staff further proposed social reforms in the medium term to reduce the deficit, such as
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“better targeting child deductions…, disability contributions, and pension indexation” (p. 16). The
greatest concern expressed in the consultation report was Poland’s labor supply shortages. The
report noted: “the evidence that growth had begun to falter even before the onset of the global crisis
because of emerging labor shortages should serve as an important reminder of the urgency of
[boosting Poland’s labor force participation rate]” (p. 28). IMF staff recommended “increasing the
effective retirement age and equalizing the statutory retirement age of men and women” (p. 22).
Poland “is the only EU country to have escaped a recession in 2009 due to its limited reliance on
exports, well-capitalized and profitable banking system, flexible exchange rate, and limited pre-crisis
imbalances” (p. 1). In the 2010 Article IV consultation, IMF staff credited “the highly countercyclical fiscal policy [as being] a main reason for Poland’s [economy] having avoided a recession” (p.
25). The staff found Poland’s deficit target of 3 percent of GDP by 2012 to be “too ambitious,” and
proposed meeting the target by 2013-14 (p. 18, 25). Furthermore, staff recommended “adopt[ing] a
permanent, binding expenditure rule with a deficit or debt anchor” (p. 19). In the staff’s assessment,
“substantial fiscal adjustment needed over the medium term will require changes in entitlement
programs” (p.19). Options proposed included “tightening pension indexation, rationalizing other
benefits (sickness, disability, etc.), and increasing the flexibility of limits on defense spending,” along
with “further revenue-enhancing measures” (p. 19). In terms of monetary policy, “staff believes that
a rise in policy rates would not be warranted any time soon” (p. 22). They proposed “limited
foreign-exchange interventions,” and discouraged “early euro adoption” (p. 1, 24, 26).
By 2011, Poland was on the path to archive the deficit goal. The 2011 Article IV consultation report
noted: “on staff’s baseline projections, the fiscal deficit would fall over the medium term to 2
percent of GDP… To reduce debt firmly over time, the fiscal deficit should be cut to no more than
1 percent of GDP over the medium term” (p. 8). IMF staff reiterated the recommendation of
reforms of entitlement programs and structural reforms to increase labor force participation rates,
including raising the retirement age and tightening indexation (p. 9, 14). Due to growing concerns
about inflationary pressures, staff advised “some further gradual hikes in the policy rate will be
needed to bring inflation back to target” (p. 11, 15). Finally, “euro adoption remains an important
long-term objective” (p. 15).
Portugal
In the 2008 Article IV consultation, IMF staff observed that “despite impressive recent
consolidation, Portugal’s fiscal situation remains weak, and consolidation needs to continue in 2009”
(p. 18). Staff advised that “structural consolidation should be at least a ½ percent of GDP,” and
“beyond 2009, additional measures of about 1 percent of GDP will likely be needed to reach the
MTO [medium-term objective]” (p. 18). “At the root of Portugal’s economic problems,” staff
argued, “lies anemic productivity growth and a significant external competitiveness gap” (p. 3).
Therefore “further reform should focus on making the economy more flexible and competitive” (p.
3). This would include reconsidering “higher rate of social security contributions on fixed-term
contracts,” “implement the EU Services Directive to make a clean sweep of regulations at all levels
of government,” and “strengthening judicial system efficiency” to support the effectiveness of the
Competition Authority (p. 3, 27). The IMF did not conduct Article IV consultations for Portugal in
2010 and 2011.
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Romania
The 2010 Article IV consultation focused on fiscal consolidation in the form of spending cuts in the
medium term. “With continued reductions in public employment and the enactment of pension,
health and education reforms, the deficit would remain on a downward path to fall below the 3
percent Maastricht threshold in the medium-term without the need for major tax increases.” (p. 30)
Staff identified three “key elements in the medium-term fiscal adjustment strategy: 1) “pension
reform;” 2) “reforms to permanently rein in the wage bill;” and 3) “reforms of social spending” (p.
21-22). To reduce social spending, IMF staff recommended “reforming social assistance programs,
streamlining the number of programs and improving the targeting and incentives in the remaining
ones” (p. 22). While pension reforms should include “build[ing] up the pillar two private pension
system.” (p. 22)
Pension and educational reforms were also seen a means to increase potential growth. “Lifting the
Romanian employment rate… while reforming the early retirement schemes would boost potential
growth by about 0.6 percentage points, help with fiscal sustainability, and pensions costs” (p. 26).
Proposed “labor reforms should include helping low-skilled workers enter the job market and
promoting senior labor” (p. 26). The consultation report did not offer any specific recommendations
on education reform, but agreed with the education reform under consideration of setting a
nationwide standard wage for teachers, increasing teaching hours per teacher and decentralizing
decisions (p. 27).
Slovakia
The 2009 Article IV consultation discussed the key challenge for fiscal policy “to anchor an
accommodating fiscal stance during the recession within a credible medium-term consolidation
strategy” (p. 9). The staff argued for bringing down the deficit to below 3 percent of GDP by 2011.
“To achieve the recommended deficit path, a combination of expenditure and revenue measures
should be considered” (p. 9). Specific recommendations included “additional health care reform,”
“wage growth moderation in the public sector,” “broaden the base of social security contributions,”
and “higher taxes on income” (p. 9). Moreover, the staff stated that “productivity-enhancing
structural reforms, wage discipline, and labor market flexibility should remain policy priorities” (p.
16). Specifically, “the government should continue to improve the business environment and place
special focus on strengthening the education system” (p. 16).
By 2011, “Slovakia [had] swiftly recovered from a deep recession” (p. 1). The 2011 Article IV
consultation report predicted that the country “is facing a favorable medium-term macroeconomic
outlook” (p. 1). Staff’s views were that “fiscal consolidation should continue with the aim of
reducing the deficit to below 3 percent of GDP in 2013;” and “fiscal adjustment efforts need to
continue beyond 2013” (p. 12). The staff recommended “capping expenditure growth in real terms
for 2012-15 [to] set a consolidation path toward a deficit of 1 percent of GDP” (p. 13). Nonetheless,
“in spite of the strong recovery,… long-term unemployment of low-skilled and young workers has
risen to among the highest in the EU” (p. 1). “More than one out of three workers under 25 was
unemployed” (p. 24). The staff commended the Slovak authorities on their new labor market policy
initiatives, but proposed further focusing training, education and vocational programs toward labor
market needs (p. 24-25). Moreover, “differentiating the minimum wage among regions… could help
strengthen employment incentives,” and “improving the transport infrastructure and private rental
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market could help ease labor mobility constraints” (p. 25). To maintain competiveness, the staff
advised productivity gains, labor market flexibility and wage growth moderation (p. 25).
Slovenia
By spring of 2009, “Slovenia’s economy [was] increasingly affected by the global crisis” (p. 1). In the
2009 Article IV consultation, “the authorities and staff concurred that a fiscal stimulus [was]
necessary,” and staff supported a fiscal stimulus of 2.1 percent of GDP (p. 10). However, “staff
stressed that the fiscal position should be reverted to a more conservative stance as the crisis
subsides” (p. 11). Where “fiscal adjustment should mainly come through the consolidation of
expenditures” (p. 11). To achieve long-term fiscal sustainability, the staff recommended pension
reform that would “de-link[] pensions from wages and increase[e] the retirement age” (p. 12). The
staff also expressed concerns over Slovenia’s competitiveness having deteriorated as a consequence
of large devaluations in neighboring countries, and argued for “further liberalization of employment
protection legislation [being] necessary in the medium term and could be implemented in the
context of a ’flexicurity’ approach” (p. 12). Staff disagreed with Slovenia’s work-sharing stimulus
initiative, arguing that it was not “sufficiently targeted to the most vulnerable groups,… might entail
a risk of abuse, and would be hard to reverse if the crisis continues” (p. 11).
Slovenia experienced “one of the largest GDP declines in the euro area” (p. 1). The 2011 Article IV
consultation discussed “putting growth and public finances on a sustainable path.” (p. 1) IMF staff
argued that “while general government debt is likely to remain sustainable, fiscal consolidation is
necessary in light of the uncertainty in financial markets and contingent liabilities” (p. 8). Where
“consolidation should take place on the expenditure rather than the revenue side” (p. 8). Among the
expenditure measures proposed were no new increases in the public sector wage bill, “rationalizing
government employment; and reforms to strengthen the targeting of transfer programs and tighten
eligibility” (p. 9). Pension reform proposals focused on “reducing the replacement rate and
increasing… retirement age” (p. 9). “Finally, the private pillar should be expanded to compensate for
the public benefit cuts” (p. 9). The staff found that “structural reforms in the labor and product
markets [were] critical to boost potential growth” (p. 20). Slovenia’s “unemployment compares
favorably to other euro area countries. However, the many job losses in the construction sector are
probably permanent… Labor market flexibility should therefore be increased” (p. 15-16). Staff
recommended loosening of “labor market restrictions – especially for dismissals,” “cancelling any
remaining indexation of the minimum wage and eliminating the mandatory wage supplement for
years of service” (p. 20).
Spain
By early 2009, “Spain [had] entered a sharp downturn” (p. 1). The 2008 Article IV consultation,
released in February 2009, cautioned “fiscal policy needed to remain cautious given that some fiscal
powder also should be kept dry, as a contingency, to assist banks with capital, if needed” (p. 27).
Staff calculated that Spain’s public sector net worth would drop to -147 percent of GDP in 2009,
and therefore “Spain has no fiscal space for expansion, unless the authorities commits to
adjustments” (p. 30). If “further fiscal support were needed, staff stressed that this should be
combined with long-run fiscal, labor (such as agreeing with social partners on a program of wage
moderation and labor market liberalization), and product market reforms” (p. 27). Structural
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macroeconomic labor reform recommendations were “elimination of wage indexation, earlier
adoption of opt-out clauses from bargaining contracts…, and a reduction in the segmentation of
labor markets between fixed-time and full-time contracts” (p. 39). Staff also recommended framing
fiscal policies in the long run context of sustainability to strengthen confidence to “avoid private
agents from turning Ricardian” (p. 39). Sustainable fiscal adjustments proposed were “parametric
pension and health reforms; extending retirement ages; limiting benefit indexation for the wealthiest;
a combination of progressive income tax increases and expenditure cuts…, [and] phasing out the
mortgage interest deduction” (p. 31-2).
In the 2010 Article IV consultation, IMF staff noted that “the necessary adjustment is underway and
output has stabilized” (p. 1). The staff endorsed Spain’s “ambitious fiscal consolidation to reach the
3 percent of GDP deficit target by 2013” (p. 13). The staff argued that “empirical evidence also
suggests that recoveries from economic crises often serve as an opportunity for reform” (p. 13).
Specifically, “Spain needs a bold pension reform” including “raising the retirement age, [and]
increasing incentives to work in old age… to help bolster sustainability” (p. 17). IMF staff’s
assessment of the labor market was that “the labor market is not working” (p. 19). Therefore, the
staff argued that “a radical overhaul of the dysfunctional labor market is urgent” (p. 20). Specific
proposals to make labor markets more flexible included “lowering severance payments,” and
“reduc[ing] protection of permanent contracts with decentralized wage setting and eliminating
indexation” (p. 20, 25).
By 2011, the Spanish “economy [was] gradually recovering and rebalancing is underway.” (p. 28) But
“the recovery has not been enough to reduce very high levels of unemployment” which were around
21 percent (p. 9). The 2011 Article IV consultation report noted that “Spain’s unemployed need a
decisive improvement in employment prospects” (p. 26). Therefore, “policy should thus err on the
side of boldness rather than gradualism” (p. 26). IMF staff recommended “collective bargaining
needs to be effectively decentralized to the firm level,” “social partners should move away from
inflation indexation,” “severance payments should be further lowered,” and “improving retraining of
workers with mismatches skills, supporting youth employment, and ensuring that the incentives to
return to work are sufficient” (p. 26).
The IMF staff commended the Spanish authorities on their fiscal consolidation plans, but cautioned
“deficit target path [cutting the deficit to 2.1 percent of GDP by 2014 from 9.2 percent in 2010] is
appropriate, but… is based on relatively optimistic macroeconomic projections” (p. 20). The staff
argued that additional measures may be required, including “further reducing current spending” (the
public wage bill),” “cutting investment,” and “raising…VAT and excise rates” (p. 21). To address
longer-term spending pressures, the staff urged “the government [to] commit to an early date to
archive the MTO [medium-term objective] of a balanced budget and pro-actively manage below-theline operations (such as privatization)” (p. 30). Moreover, “pension reform should also be quickly
passed and implemented, and ideally strengthened in some areas” (p. 30).
Sweden
“Up until the spring of 2008, the Swedish economy boomed” (2009: p. 3). However, “Sweden has
been hit hard by [the international financial wholesale markets] crash” (p. 3). IMF staff assessed that
“the authorities’ response was prompt and appropriate,” and “monetary policy is appropriate” (p. 3,
4). Most of the 2009 Article IV consultation addressed short-term policies with the “immediate
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prospects for recovery [being] at the mercy of developments abroad” (p. 3). A medium-term
recommendation was that “the target of a surplus of 1 percent of GDP over the cycle should
remain, as should firm commitment to the nominal spending ceilings” (p. 4).
In the 2010 Article IV consultation, IMF staff provided little fiscal and monetary policy advice. They
stated that that “the current fiscal rules -- targeting a surplus of 1 percent of GDP across the cycle,
supported by medium-term expenditure ceilings – remain[ed] well suited for Sweden” (p. 36). The
2010 report also assessed the labor market situation, noting that “the labor market has held up much
stronger than expected” (p. 32). IMF staff commended Sweden for making more resources available
for “preparatory and vocationally-oriented training, and improved information for job seekers
regarding vacancies” (p. 32).
By 2011, “Sweden ha[d] recovered strongly from the global recession” (p. 3). The IMF Article IV
consultation report found that “Sweden’s exit from the global crisis has been uniquely successful
compared to others in the European Union” (p. 24). Nonetheless, “the output gap – however
measured – was well below expectations, as was unemployment” (p. 11). Recommendations in the
2011 consultation on fiscal and monetary policies focused on the shorter term, specifically, “the
underlying fiscal stance should remain unchanged;” (p. 24) and “the monetary stance should
continue to tighten in 2011” (p. 25). The consultation further discussed labor markets in some detail.
IMF staff recommended “moderate settlements in the 2011-12 wage round – in the neighborhood
of 3 percent” (p. 25). In order “to drive unemployment down to 5 percent on a sustained basis”,
“policies should continue to reduce unemployment rates without lowering adult participation rates”
(p. 15). Specific proposals were “lowering labor market frictions, including impediments to
matching,” and “the introduction of permanent concessionary wage determination arrangements for
new entrants to the labor market” (p. 15, 16).
United Kingdom
One of the main concerns discussed in the 2008 Article IV consultation was inflation. (Following
the release of the consultation on July 7, 2008, the IMF released a supplement to the report on July
25, 2008). In the supplement, IMF staff wrote that “the case for strengthened policies remains.
Long-run inflation expectations have risen further” (p. S4). IMF staff recommended “a monetary
stance that remains focused on the inflation target,” (p. 4) and “remain[s] firmly focused on price
stability” (p. 22). The report stated that “tight monetary policy and subdued growth will be required
to prevent elevated inflation expectations from getting embedded into wages and prices” (p. 22). To
keep inflation expectations in check, “continued moderation in nominal earnings growth will be
essential,” but staff noted that “tolerance for ongoing low real earnings growth is uncertain with
continued tight labor markets” (p. 4). In terms of fiscal policy, IMF staff recommended the “40
percent net debt ceiling should be retained,” and if the 40 percent is breached, “concrete plans to
bring it back under the ceiling on a sustained basis should be announced promptly” (p. S4, 5). In
order to rebalance demand, and adhere to the debt rule, IMF staff noted that “budget consolidation
will be essential” (p. 21). IMF staff calculated that “it would take an adjustment averaging ¾ a
percentage point of GDP per year… to set debt on a path to return under the ceiling by 2012” (p.
S4). Moreover, the staff made the case for “nominal expenditure ceilings.” (p. S4) “Nominal
spending caps are simple and transparent” (p. 33). Finally, “if the medium-term outlook for the
current account deteriorates, additional structural fiscal consolidation may be needed 2009 and
beyond” (p. 4).
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By 2009, “the United Kingdom [had] been hit hard by the global financial crisis” (p. 4). Inflation was
no longer a threat as “inflation [was] set to continue falling and remain below target for some time”
(p. 31). The 2009 Article IV consultation stressed that “a strong commitment to medium-term fiscal
consolidation is crucial,” (p. 38) as “the success of the current policy package hinges on continued
trust in the sustainability of the fiscal position” (p. 6). IMF staff recommended that the focus of a
fiscal consolidation plan be “on putting public debt on a firmly downward path faster than
envisaged… and to weigh the adjustment toward expenditure reduction” (p. 6). The consultation
does not provide specifics on expenditure-based consolidation other than mentioning
“implementing structural reforms to address the rising costs related to demographic change,
especially in health care” (p. 39).
By 2010, the staff’s assessment was that the “UK economy [was] on the mend, but crisis-related
scars still needed healing” (p. 42). In the 2010 Article IV consultation report, IMF staff wrote:
“although this consolidation effort involves painful decisions and dampens short-run growth, it is
necessary to enhance credibility and ensure fiscal sustainability.” (p. 26) The staff commended the
UK authorities for the fiscal mandate of balancing the cyclically-adjusted current budget over a fiveyear rolling horizon (p. 26). Emphasis should be on spending reduction and “more weight should be
given to reducing public sector compensation premia and achieving savings in benefits and transfers
through better targeting” (p. 43). In order to bolster fiscal sustainability, “entitlement reforms to
address long-term fiscal challenges should be pursued” (p. 30, 43). Specifically, the UK should
accelerate “the planned increases in statutory retirement age for state pensions and gradually aligning
the generosity of public pensions” (p. 31). With regards to monetary policy, staff noted that “a
highly accommodative monetary stance remains appropriate” (p. 42). “If a stalling recovery were to
heighten disinflationary forces, quantitative easing should be expanded” (p. 37). On the other hand,
gradual tightening is needed with the prospect of above-target inflation (p. 38).
In 2011, the economic “recovery stalled…inflation remains elevated, and unemployment is still
unacceptably high” (p. 1). The 2011 Article IV consultation focused primarily on evaluating the
economic situation and authorities’ policy plans (p. 5). The IMF stressed that the strong fiscal
consolidation underway was “essential to achieve a more sustainable budgetary position, thus
reducing fiscal risks” (p. 1). As growth resumes, withdrawal of monetary policy through policy rate
hikes and asset sales should be gradual (p. 31). IMF staff found the UK path of consolidation
appropriate, but recommended further structure reforms to address remaining longer-term fiscal
imbalances and support medium-term growth, including “accelerating increases in the state pension
age and indexing it to longevity,” “reforming public-service pensions,” “easing tight planning
restrictions” to increase new real estate developments” (p. 36-37).
Conclusion
This content analysis of IMF article IV consultations in the European Union shows a consistent
pattern of recommendations on fiscal policy as well as policies concerning employment and social
protections. There is an overwhelming emphasis on fiscal consolidation, reduction of social
expenditures, as well as measures that would weaken the bargaining power and income of labor, and
make it more difficult for governments to promote growth and employment or reduce poverty and
social exclusion. The findings herein confirm prior research on IMF Article IV consultations in
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other countries, including most recently Islam et al. (2012). That analysis, which looked at 50 Article
IV consultations for developing countries, found similar predilections with regard to fiscal
consolidation and other “one-size-fits-all” policies that were not necessarily appropriate for these
developing countries.
It is difficult to measure the influence of the Article IV consultation process and papers, but clearly
they are important. In many cases we can see that the recommended measures are adopted, even
against considerable political resistance – for example, the comprehensive labor law reforms in
Spain, which weakened industry-wide collective bargaining and employment protections; and public
pension cuts in Italy. These were countries that did not have a lending agreement with the IMF. The
Article IV papers are also read by financial analysts and can play an important signaling role to
financial markets.
Of course, IMF policy recommendations carry more weight with smaller countries in the EU
(countries such as Germany and France are likely to feel less pressure to follow their advice); and
they carry the most weight of all in borrowing countries, since their financial stability is at risk if they
do not follow IMF advice. As noted above, the impact of IMF policy recommendations in these
countries (e.g. Greece, Ireland, Latvia, and Portugal) is not completely captured in the Article IV
papers examined here, and may have had a large impact on the prolonged crisis in Europe.
The IMF now has the majority of its loans in EU countries, a portfolio that is drastically different
than just a few years ago. (IMF 2012c: Table 2a; IMF 2012d: Table 3a) It should be noted that the
IMF’s decisions and recommendations in Europe are overwhelmingly influenced by the European
governments who sit on its Board of Governors and Executive Board, and especially the larger
countries. This is somewhat different than its decision-making in developing countries. In Latvia, for
example, there is evidence that IMF economists did not favor the enormously costly (in terms of
lost output and employment) “internal devaluation” strategy that it agreed to and was
implemented.11 Nonetheless, the IMF is by virtue of its lending and role, an important member of
the so-called “Troika” that is deciding and implementing policy in the borrowing countries in the
eurozone, as well as influencing policy throughout the European Union.
As noted above, since – as some economists have argued – policy mistakes have played a major role
in the prolonged economic crisis and current recession in Europe, IMF policy recommendations in
this region deserve special attention. Because of Europe’s current influence on the problems of the
global economy and the apparent struggle between the Troika and eurozone governments over what
kinds of “reforms” will be necessary to get the authorities’ cooperation in putting an end to the
crisis, the reform agenda represented in these Agreements takes on a special importance. That
agenda has proven deeply unpopular, and has contributed to the fall of many European
governments in the past three years.
The reform agenda represented in these agreements appears also to conflict with other goals that the
European Union has agreed upon, for example the goals represented by Europe 2020. It is difficult
to see how research and development expenditures can be increased to 3 percent of GDP, for
example, or the number of people at risk of poverty and social exclusion can be reduced to meet the
Europe 2020 targets, if fiscal consolidation and cuts to social expenditures continue. Even the
climate change goals will be more difficult to reach without the means for public investment in
11 Weisbrot and Ray 2011: 8; and also see statement by Anders Aslund in Weisbrot 2012.
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reducing fossil fuel consumption. All of these goals, as well as the necessary economic recovery
from the regional recession, are also in conflict with the Fiscal Compact signed in March 2012,
which provides for further tightening of fiscal policies and more mechanisms to enforce this
tightening. The IMF’s agenda in these Article IV consultations is in line with the Fiscal Compact,
but not with the economic and social goals of Europe 2020.
There has been much debate over the role of IMF surveillance since the IMF’s admitted failure to
apprehend the risks to the global economy in the run-up to the Great Recession. The IMF’s
Independent Evaluation Office issued a report noting that the IMF “fell short” in its “most
important purpose” of “warning member countries about risks to the global economy and the
buildup of vulnerabilities in their own economies,” and that this failure was due to such factors as “a
high degree of groupthink; intellectual capture,” and “an institutional culture that discourages
contrarian views,”… “while political constraints may have also had some impact” (Independent
Evaluation Office 2012: p. vii, 1).
The IMF (2011) produced recommendations for improvement in its 2011 Triennial Surveillance
Review. There has been a noticeable improvement in the IMF’s multi-lateral surveillance and risk
assessment in the past few years. There has also been a wider range of views on macroeconomic
policy issues expressed within the research department of the IMF than there was before the Great
Recession.
However, this review of Article IV agreements shows that there has been little change in the IMF’s
policy advice to European countries. It also supports the view that policy mistakes by the European
authorities – including here the IMF’s overwhelming priority of fiscal consolidation – have
unnecessarily prolonged and deepened the crisis in Europe, and contributed to a reform agenda that
worsens the impact of the crisis on vulnerable parts of the population.
The content analysis in this paper suggests that the IMF might wish to engage in an IEO review of
its policy advice in Europe, similar to its review of the IMF’s surveillance in the run-up to the Great
Recession and its review of the IMF’s policies during the Asian economic crisis of the late 1990’s.
Both of these reports found serious mistakes and led to significant changes in both research and
policy at the IMF. Given the urgency of the present situation in Europe, an expedited review of
current policy might enable the IMF to play a constructive role in Europe’s recovery. At the same
time, it will also demonstrate the IMF’s commitment to the goals of accountability and transparency
in its role as ‘trusted advisor.12
12 This is the expression used by the IEO. It is finalizing an evaluation on the theme of ‘The role of the IMF as Trusted
Advisor’. See IEO (2012) ‘Dialogue’, Fall, available at
http://www.ieoimf.org/ieo/files/newsletter/newsletter_fall_2012.pdf.
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Macroeconomic Policy Advice and the Article IV Consultations
CEPR
Appendix A
List of IMF Article IV Consultations
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
2008
2008
2008
2009
2009
2009
2010
2008,
2008
2008
2008
2009
2008
2008
2009
2008
2009
2009
2008
2010
2010
2011
2010
2010
2010
2009
2010
2009
2010
2010
2011
2011
2011
2011
2011
2010
2011
2011
2010
2010
2010
2010
2009
2009
2011
2010
2011
2010
2008
2010
2008
2009
2009
2009
2009
2009
2010
2010
2011
2011
2011
2010
2011
50
